When is it worth it?

Hi guys, is there a formula to use to help determine if the risk involved is worth the income you earn? I do not mean a risk reward ratio per trade, but something more long term. For example, Im trying out a system with a 75:35 win loss ratio, and it gives me positive pips in the long run but, only 200 pips after 60 demo trades.

In a Micro account that would mean I’d earn $200 after 60 trades, which is not bad, but it also means I risked $35 sixty times! So it kinda makes my risk not worth it right?

So Id like to know when is the expected income big enough to make a system of risks worth it? Any formula?

There are several formulas which might help you to analyze your trades. To get useful insight from them, you need to start with accurate numbers.

You said that your win/loss ratio is 75/35. Not possible. Did you mean 75/25? or 65/35?

Also, are you using approximate figures when you say $200 profit on 60 trades? And are you saying that your average loss is $35?

Let me ask you to pull some actual numbers from your broker’s statement. You should print it out; a printed copy that you can mark up will be easier to work with than trying to do this on your computer screen.

Use the printed copy of your broker’s statement to find or calculate the following:

[B]1.[/B] If there are any break-even trades in that group of 60 demo trades, you need to exclude them.

[B]2.[/B] After excluding break-even trades, count up how many winners and how many losers you had.

[B]3.[/B] Calculate your average winner. (Total up the dollar-value of the winners, and divide that figure by the number of winners.)

[B]4.[/B] Calculate your average loser in similar fashion.

[B]5.[/B] Find and record your largest winner, and your largest loser.

[B]6.[/B] Count and record your longest string of losers.

[B]7.[/B] Determine your maximum drawdown. Without knowing your trading method and trading rules, I can’t know [B]whether[/B] you need to determine maximum drawdown. It’s possible that your largest (closed) loss[B] is[/B] your maximum drawdown. But, depending on how you use stop-losses and/or how you actively manage your trades, it’s possible that one or more trades involved a drawdown[B] larger than indicated[/B] by the closed trades. You will have to determine this, possibly from memory, because you can’t read it in your broker’s statement.

Depending on the numbers you determine above, there are several ways to analyze your trading results. As an example, I will use the numbers from your previous post in the following formula:

[B]Profit = (number of winners)(average winner) - (number of losers)(average loser)[/B]

If I understood your previous post, Profit = $200, your win/loss ratio is something like 75/25, total number of trades = 60, and your average loser = $35. If those numbers are correct, then they plug into the formula, as follows:

$200 = (45 winners)(average winner) - (15 losers)($35 average loser)

Solving the equation, we find that your average winner = $16.11.

Now, we can calculate that your actual risk/reward ratio is $35 / $16.11 = 2.17:1

[B]If[/B] we had the correct numbers to start with, what would these results tell us?

By itself, your win/loss ratio of 75/25 (if that’s the correct number) is fine. And, by itself, a risk/reward ratio of 2.17:1 is not[B] necessarily[/B] bad. But, the combination of the two is giving you paltry results.

How do we measure “paltry results”? One way is: Total profit / number of trades. In your case, $200 / 60 trades = $3.33 average profit/trade. In other words, your average profit per trade is less than one-tenth of your nominal risk ($35) per trade.

But, all this is hypothetical, based on my guess as to what win/loss ratio you meant to state in your post.

If you can furnish exact numbers, I can help you further.


Hi Clint
Thanks for the comprehensive reply. Im still digesting it, but at the outset, let me clarify a few things I did not make clear.

When I said 75-35, I meant take profit at 75 pips and stop loss at 35. So tha ratio is around 2.14:1

I did 60 trades and won only 36%. My definition is winning is any positive pip trade, so 1 pip to 75 pips (I have two exits, one is the T/P and the other is when the EMAs cross)

$200 is approximate, (I dont have statements because I only pencil traded), but I derived it by multiplying the number of pips with $1 per pip for a 10,000/lot account.

Again I really appreciate you taking time to answer this.

Your SL is toooooooo tight.
Open a micro account and start trading with a few cents, much better learning curve because something is at stake.
Twist, turn, multiply, divide… your non existing money will not do.:slight_smile:

I’m having trouble understanding what you are doing, and why.

Back in the old days, “paper trading” meant simulated trading on paper, with a pencil. But, not any longer. “Paper trading” now generally means simulated trading in a demo (practice) account, with “virtual” money. With a free tool such as a demo account at your disposal, why would you “paper trade” the old-fashioned way, with pencil and paper?

It’s not possible to do an analysis of your trading results without more information. I would suggest that you test this method of yours in a demo account, and then do the math I outlined in my previous post.

Reading what you have written so far, one thing sticks out: your win-loss ratio is not good. 36% winners means a win-loss ratio of 36/64, which is essentially upside-down. A coin-flip should give you close to 50/50 with your eyes closed. So, maybe there’s a basic flaw in your method.

Write back with some specific demo-trading results, and we’ll try to continue this analysis.