Forex Win To Loss Ratio

Forex trading is quite complicated and often delicately balanced on movement and influence of several factors. Trading without knowing the basics of the market and a solid strategy at place can lead to devastating results. In those cases one can only expect more losses than profits. But, when you have a system of trading, the win to loss ratio will be much better than other traders.

Win to loss ratio in forex can be defined as number of winning trades to losing trades. It is the ratio of average profit to the average loss per trade. Say, you expected a profit of $1000 and expected loss is $200 for one particular trade, then the profit to loss ratio is 10:2.

In many instances, we find that it is advised to maintain profit to loss ratio of 2:1 or 3:1. But this can be confusing at times. You have to consider the practical forex market situations, your individual trading style, and strategies while deciding on the ratio. There is also something known as statistical expectancy or APPT (average profitability per trade) that is of great importance.

APPT is the average amount you can expect to win or lose from each trade. There is a formula for calculating APPT, which is
APPT = (Probability of Win x Average Win) – (Probability of Loss x Average Loss)

For example, if you placed 10 trades among which you won in 3 and lost in 7, the probability of winning is 30% or 0.3, and your probability of loss is 70% or 0.7. If your average profit is $500 and average loss is $200, the APPT will be (0.3 x $500) – (0.7 x $200) = – $10. As the calculation returns a negative value, it means for every trade you are likely to lose $30. Now, you must have realized why APPT is more important than a win/loss ratio. This example has a win/loss ratio of 2.5/1, but still comes out to be a loosing proposition. The reverse case can also be true, where a win to loss ratio of say 1:3 can actually return profit.