Forex Win to Loss Ratio

It is said that most people who trade in the forex market, work without a trading strategy, and therefore lose money in the long term.

A forex trading system or strategy is the tool to give you the edge in the forex market. It determines if you make money or not in the forex market. So once you tread in the market with a systematic approach, your win to loss ratio will be higher than others.

A good trading system is one that has been backtested or measured and therefore presents an edge over the market, to make good consistent profits. A profitable forex system may have a win-loss ratio i.e. the proportion of winning trades to losing trades of say 0.8 (80%).

And the profit-loss ratio on the size of the average win to the size of the average loss may be say 2-3 to 1. Here, you can quickly find out, that it is the combination of the win-loss and profit-loss ratios, which is also known as profitability ratio, tells you if the system is profitable.

When multiplied, the profitability ratio should add up to greater than one. As long as this number is greater than 1, the system is profitable. Ideally, the higher the number the better.

A forex system with a high win-loss ratio is psychologically easier to trade! On the other hand, the high profit–loss ratio makes the trade results rewarding as in that case you are not making money just to give it back to the market. But, ultimately it is the combination of win-loss and the profit loss ratio that really matters. So find out a system where both of these parameters are high.

A forex system’s profits may be expressed in pips, or dollar amounts based on a float. Profits expressed in pips are probably the most commonly used indicator of a system’s performance. The alternate way is to quote the dollar returns based on a hypothetical float.

If you have two systems that quote these ways, and have the same float, you can make a comparison of their win-loss ratio -- the percentage of trades that are winners, compared to those that are losers. Some systems that have only a moderately high hit rate are still profitable if their win-loss ratio is good.

One of the major statistics on forex day trading or currencies back testing plan that you need to understand, is the R (Risk) multiple principal -- the risk you take on any trade when you enter the market. The R multiple of a trade is the ratio of the profit or loss compared to the amount of money risked to make the profit or loss.
For example, if you risk $200 dollars in your initial purchase, and you make a profit of $1,000, you have made five times the amount you risked in the trade. The R multiple is five in this case. This statistic gives you a good idea of the relative size of your profits to your losses.