- August 30, 2021
- 4:00 pm
- Technical Strategy
Understanding important trading metrics for maximum trading profit
The majority of traders do not utilize account metrics to analyse their trading performance. Not using them is essentially throwing money away. In this blog post, we discuss some of the most important metrics we use.
For most Forex traders, net profit is the ultimate measure of success, but it doesn’t tell us everything. Net gain provides no evidence of how much time or how much money was spent, which is crucial information for evaluating performance.
Comparing traders with different profit margins and time frames might be difficult at times. Take a look at the following scenarios: Trader 1 posted a profit of $20k after two weeks of trading. Trader 2 on the other hand, after 6 months of trading Forex, generated a net profit of $80k. Who wins?
If we only consider how much money was made in those six months, trader 2 is performing better, but when you examine both the amount earned and the time it took this individual to complete all of those trades, trader number one obviously wins since he managed his trade correctly in much less time!
Profit factor
The profit factor refers to the amount of capital that was earned, compared to the capital lost when Forex trading. It’s very common to incur losses over the course of a trade and make profits as well. What matters is whether you’re making more than you are losing in the long run over a large sample size of trades.
To calculate this, divide your total winnings by your total gross loss. Congratulations, you are a winning trader if it generates an acceptable percentage! This figure will be automatically calculated for you in your dashboard within your account metrics for your funded Forex trading account.
It’s critical to understand how your trades are performing as a Forex trader in order to avoid taking on too much risk or pulling back when the Forex market is at its most profitable. By dividing a trade’s profits by all of its losses and multiplying by 100, the profit factor index is calculated. As a result, anything above one is regarded as high performance, while anything below one indicates that you are not doing well for yourself.
A factor of 1.0 (and below) refers to poor performance, while a factor of 2.1 and up is excellent. The range (1.1-2) depicts average trade performances that vary depending on the skill level of the Forex trader or their trading strategy for each type of investment they deal with at that time. Due to external factors such as competition from other Forex traders whose success may have been exaggerated, it will not always be successful. This affects market pricing and may quickly derail trades.
Win ratio
The win ratio is a useful metric. The ratio denotes the number of winners versus losers during a specific period of time, usually a day or week. To calculate the win ratio, simply divide the number of winning trades by 100% of all trades that occurred during this time period (winners/losers).
The majority of beginning Forex traders make a common mistake to assume they need 50+ percent on their trade ratios to be profitable, but most traders can do well with less than 25%.
If you want to get as close to perfecting any percentage as possible, you can utilize one of two methods: Before adjusting percentages, first determine what point would have been regarded as profitable.
Average win vs average loss
The win ratio represents the number of winners vs. losers in a given time frame, typically one day or week. To calculate the win ratio, just divide the number of winning trades by 100 percent of all trades that occurred during this time period (winners/losers).
The average loser and the number of losers a trader has in their portfolio can help determine how great an impact one loss could have on your overall profits. If you’re averaging 3x more winners than losers, for example, it could be safe to add another strategy like scalping, because losses won’t have as much of an impact on your bottom line.
If you’re not doing so well with this metric, or even worse, if you’re losing money on every trade, strategies with higher win rates are probably better for individuals who don’t want to take huge risks but still want to earn impressive profits.
Expectation
The riskiness of a trading strategy may be determined by the expectation of your trading profit. When you multiply the average loss and expected value together, you obtain a “expectation” measure that informs you whether or not it’s worth it to take this risk.
The measurement ranges from 0 to 0.4. It indicates that investment will almost certainly provide a negative return, with 0.5 being acceptable but anything below 1 indicating that there is no reason to be optimistic. The investment may only break even over time, but returns above 1 are healthy and have upside potential.
The risk of an investment is determined by the expectation metric (high or low). Because changes in the Forex markets are impossible to foresee, investors must carefully evaluate the expectancy of their trade against the risks of a negative outcome. Even when there is no market turbulence, you should seek trades with positive yields while assessing them. Those are investments most likely to come out ahead regardless of how events unfold!
Duration
The holding time is important to traders because it determines how long they are “locked” into a trade. If your trades last for weeks or months, then the total amount of profit you will make in that timeframe might not be as high because your capital cannot be reallocated elsewhere while committed to this trade.
It’s also worth noting that day trading and swing trading have different standards for their respective lengths. However, they share one common trait: more flexibility for the investor than those who prefer longer-term ventures.
The holding time can determine how much money a Forex trader makes over an extended period since they do not have access to the funds during this duration, but only after completion of said transaction. Holding time, or the amount of time a trade is open, is not only an indicator as to whether the trade was successful, but also the potential profit.
When your capital is locked away from other trades, another opportunity may arise and if you do not take advantage, all potential profits will go to waste!
Holding time limits the number of simultaneous trades due to its effects on net profit, both limiting financial gain and making trading more difficult by consuming valuable resources such as capital and mental energy.
