To properly manage risk and get the probabilities in your favor, you have to develop a profitable trading strategy. Theoretically, different strategies produce different results. But of course, these results can differ widely from the actual results of your trading account. Your track record can show you how well your strategies are performing.
Strive to maximize the average winner to average loser ratio and the winning percentage
Essentially, for a trading strategy to bring a profit, it must satisfy one of these conditions. The average winning trade must be bigger than the average losing trade, or it must produce more winners than losers on the average. When these two conditions are both met, it is an excellent result.
Although it may not be easy to achieve, it is obvious that the higher the winning percentage, the better. However, if the average losing trade is much higher than the average winner, then the high winning percentage may be of little benefit.
Achieving this delicate balance between the two is the secret to making consistent profits in Forex trading and constantly growing your account.
Look beyond the simple numbers
The total profits or losses from all your trades, divided by the number of trades you have made, is the average return per trade also called the expected payoff. If your total result ins 1000 USD after taking 100 trades, then the average return per trade is 10 USD. In the same way, if you sustain a net loss after 100 trades, your average return per trade will be negative. Your account is growing as long as your average return per trade is in the positive zone above zero.
You also need to watch the biggest winning trade and the biggest losing trade as these can show whether you are taking too great risks. You can put a great winning percentage and a winner-loser ration at risk if you occasionally have huge losses. This is because these losses can swallow months of gains and must be controlled. Frequent big losses usually show that serious errors are occurring in the trading plan and need to be handled.
Know your goals but look at your historical results for a reality check
The risk-reward ratio, which is the stop loss and profit target that you normally put on your trades, is closely related to the average winning trade and the average losing trade. They are, however, not the same. Your risk-reward is what you are targeting according to your expectations, while your track record, average winning trade, and average losing trade are the true reality shown by your past results.
By now, you must have seen how this can affect your final output and produce very different results with the strategy compared to initial expectations. In a situation where order execution by the stockbroker is poor, a strategy that looked great initially may end up as a losing strategy. It is therefore important to test strategies on a live account in order to know the true performance results.
The win-loss ratios discussed above are what to look at once in a while to see how you are doing in the market. Do not, however, base your trading decisions on it. All decisions taken in trading forex should be based on analysis of the market and not on simple desires.
In addition, consider the spreads and commissions to the ratios and averages we have discussed in this article since they can influence your bottom line in very significant ways, especially if you are a scalper or a day trader. Some of our findings from tests that we have conducted on live accounts from different forex brokers to experience and record how spreads and trading conditions compare and can differ may shock you. It is wise for you to see the results because some of them will definitely surprise you.