How to Set a Profit Loss Ratio
Wondering how to make more on your winning positions and lose less on your losing ones? Learn to monitor and control your Forex trading for maximum profit by monitoring your profit/loss ratio in general, and for each position in particular.
It’s interesting to note that, although forex traders are correct in most of their trading predictions, they often end up losing more than they gain. The reason is simple – they make less on their winning positions, and they lose more on their losing ones. That’s why, when investing in any kind of channel, you want to keep an eye on the bottom line – is it worth your while, and are you actually making any money? We do this on two levels – overall monitoring, and controlling each specific trade – in short, your profit-loss ratio.
In forex, it’s quite easy to determine your win-loss ratio – both in general and for each trade. To see how your forex account is treating you, simply divide your total gains over a certain period by the total number of winning positions you placed during that same time. Then divide your total losses by the number of losing positions. The ratio between your average wins per trade and your average losses per trade is your overall profit/loss ratio.
Now, when it comes to placing a trade, you should set your profit-loss ratio, as well. You do that by setting take profit and stop loss orders. The distance of each one of these from your strike price is that position’s profit-loss ratio. Let’s take a look at the following chart. The support level at the moment is down here and the resistance is up here. Your base price is your strike price – that’s the value at which you opened your position minus the spread. Your stop loss and take profit orders should be somewhere near the support and resistance levels, respectively. Now you have to decide at what price you want to open the position.
If you do so here, equidistant from your orders, your profit-loss ratio will be 1:1. Put it up here, two thirds of the way from your potential loss and one third of the way from your potential profit, and the ratio is 2:1 – not brilliant: for every pip of profit you could get, you stand to lose 2.
Now move it down here – where it’s closer to the stop loss than to the take profit, and you’ve altered your ratio to 1:2: for every 2 pips of potential profit, you might lose 1 – a vast improvement.
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