Every business enterprise endeavor wants to make a profit and as much as possible, minimize losses. The traditional profit-loss ratio has been adopted by many businesses, but while it may have worked before, is it realistic when applied to this modern age? A profit-loss ratio of at least 2:1 is an acceptable scenario, but then, experts deem this as unrealistic because certain factors were never considered. This isn’t a simple exchange of goods because we have to take into account trading in the world market.
Some advocate the average profitability per trade which can be best explained through a simple illustration. For example we have 5 trades in action, but we only got a profit from 3 of them, or at least 60%. This may seem good because it appears that we made a little profit out of it. But then, how much do we make for each trade? Let’s say it’s at US$100, while the average loss is US$50. The average profitability per trade is now arrived at by multiplying the average win by the probability of win which is US$60.00 (US$100 x .6). Then, we compute the probability of loss by the average loss which is US$20 (US$50 x .40). We then take subtract the two amounts and it would show that we have a positive profitability trade of US$40.00 which is actually good since what we want is a positive result. This means that we are really making money!
Invest properly, Losing Trades, Making good trades, Proft and Loss
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