This is a little more complex, but important for money management over the longer term.
When you enter a trade you will also want to enter a stop-loss and a takeprofit order. Almost all traders seek a ratio higher than 1:1 between these two, with take-profit as the larger number for a profit/loss ratio. A 3:1 ratio means you risk one unit to make three units. For example, if your stop-loss (S/L) is 50 pips, your take profit (T/P) is 150 pips. Table 6.7 shows the basic Profit-Loss ratios for T/P and S/L pip values. Ninety percent of profit-loss ratios fall in the shaded area.
Once you make 10 trades you will know how many were winners and how many were losers. Over the long haul it is difficult to sustain more than 60 percent winners. Most traders are happy to get 40 percent winners. This can also be quoted as a ratio of winners/losers. For example, if out of 10 trades you have five winners and five losers, the ratio is 1:1. This is a relatively high ratio for winners/ losers but relatively low for profit/loss. Table 6.8 shows the basic Winners- Losers ratios.
TABLE 6.7 Profit-to-Loses Ratios
As you can intuitively see, the two are inversely correlated. To achieve a profit in the long term, the higher the profit/loss ratio, the lower the winner/loser ratio can be. Conversely, the lower the profit/loss ratio, the higher the winner/loser ratio must be to keep you in the black.
TIP: The higher your winners-to-losers ratio is, the lower your profit-loss ratio can be to meet the Profit Threshold. Conversely, the higher your profitloss ratio, the lower your winners-to-losers ratio can be to meet the Profit Threshold. Short-term traders—guerillas and scalpers—typically have high winners-to-losers ratios, but low profit-to-loss ratios. Long-term traders—day traders and position traders—typically have high profit-to-loss ratios, but low winners-to-losers ratios. There is more than one way to skin the FOREX cat.
TABLE 6.8 Winners-to-Losers Ratios
An example of this: If I hit three winners out of every 10 trades (seven losers) and achieve a 3:1 profit-to-loss ratio of $300/$100, I lost $700 but made $900 so I am okay. Table 6.9 shows the intersections of these two ratios as Positive, Negative, or Neutral (Profit Threshold). Chapter 16, “Money Management Simplified,” discusses the profit threshold in relation to the Campaign Trading Method.
TIP: Depending on your own selected T/P-S/L (Profit-Loss Ratio) you must know the Profit Threshold Winners-to-Losers Ratio. Where does the black end, the red begin? You do not want to cross that line; if possible, not even come close to it.
The light gray areas are losing and danger-zone combinations. The dark gray area of both high profit-to-loss and high winners-to-losers is difficult to maintain for any significant number of trades. Going there typically means the trader is using high leverage, investing most of his or her margin, and trading frequently. Such behavior is not sustainable over long periods of time.
For each trade you enter you must consider three factors: Leverage, Account Traded, and Required Margin. The information in Table 6.10 is also in Tables 6.7, 6.8, and 6.9 but is presented here for ready reference.
TABLE 6.9 Profit Threshold
TABLE 6.10 Leverage, Lot Size, Margin
For Futures Traders
Futures traders tend to think in dollars versus a commodity asset (silver, soybeans, pork bellies, etc.). The switch to co-relational values with ratios—one currency against another—can be a bit trying at first. The trick is to practice calculating profit and loss for fictitious trades. Again, use any of the online calculators available for practice. Change each parameter in turn and observe how it alters the others as well as the outcome. It may help to think of a currency pair as a spread.
When you enter a trade you will also want to enter a stop-loss and a takeprofit order. Almost all traders seek a ratio higher than 1:1 between these two, with take-profit as the larger number for a profit/loss ratio. A 3:1 ratio means you risk one unit to make three units. For example, if your stop-loss (S/L) is 50 pips, your take profit (T/P) is 150 pips. Table 6.7 shows the basic Profit-Loss ratios for T/P and S/L pip values. Ninety percent of profit-loss ratios fall in the shaded area.
Once you make 10 trades you will know how many were winners and how many were losers. Over the long haul it is difficult to sustain more than 60 percent winners. Most traders are happy to get 40 percent winners. This can also be quoted as a ratio of winners/losers. For example, if out of 10 trades you have five winners and five losers, the ratio is 1:1. This is a relatively high ratio for winners/ losers but relatively low for profit/loss. Table 6.8 shows the basic Winners- Losers ratios.
TABLE 6.7 Profit-to-Loses Ratios
As you can intuitively see, the two are inversely correlated. To achieve a profit in the long term, the higher the profit/loss ratio, the lower the winner/loser ratio can be. Conversely, the lower the profit/loss ratio, the higher the winner/loser ratio must be to keep you in the black.
TIP: The higher your winners-to-losers ratio is, the lower your profit-loss ratio can be to meet the Profit Threshold. Conversely, the higher your profitloss ratio, the lower your winners-to-losers ratio can be to meet the Profit Threshold. Short-term traders—guerillas and scalpers—typically have high winners-to-losers ratios, but low profit-to-loss ratios. Long-term traders—day traders and position traders—typically have high profit-to-loss ratios, but low winners-to-losers ratios. There is more than one way to skin the FOREX cat.
TABLE 6.8 Winners-to-Losers Ratios
An example of this: If I hit three winners out of every 10 trades (seven losers) and achieve a 3:1 profit-to-loss ratio of $300/$100, I lost $700 but made $900 so I am okay. Table 6.9 shows the intersections of these two ratios as Positive, Negative, or Neutral (Profit Threshold). Chapter 16, “Money Management Simplified,” discusses the profit threshold in relation to the Campaign Trading Method.
TIP: Depending on your own selected T/P-S/L (Profit-Loss Ratio) you must know the Profit Threshold Winners-to-Losers Ratio. Where does the black end, the red begin? You do not want to cross that line; if possible, not even come close to it.
The light gray areas are losing and danger-zone combinations. The dark gray area of both high profit-to-loss and high winners-to-losers is difficult to maintain for any significant number of trades. Going there typically means the trader is using high leverage, investing most of his or her margin, and trading frequently. Such behavior is not sustainable over long periods of time.
For each trade you enter you must consider three factors: Leverage, Account Traded, and Required Margin. The information in Table 6.10 is also in Tables 6.7, 6.8, and 6.9 but is presented here for ready reference.
TABLE 6.9 Profit Threshold
TABLE 6.10 Leverage, Lot Size, Margin
For Futures Traders
Futures traders tend to think in dollars versus a commodity asset (silver, soybeans, pork bellies, etc.). The switch to co-relational values with ratios—one currency against another—can be a bit trying at first. The trick is to practice calculating profit and loss for fictitious trades. Again, use any of the online calculators available for practice. Change each parameter in turn and observe how it alters the others as well as the outcome. It may help to think of a currency pair as a spread.
