A trader\'s money management system

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c11 JWBK182-McDowell April 25, 2008 16:14 Printer: Yet to come

Tracking Profit and Loss Results and More Formulas for Success 97

WIN RATIO FORMULA

This is the percent of winning trades to losing trades. The more winning

trades you have, the better, although in trading you will never have 100

percent winning trades. This ratio may fluctuate day to day, and it is impor-

tant for you to constantly observe the ratio to determine if there has been

a market cycle change or to determine if you are experiencing a normal

drawdown.

When your win ratio is low, there is the possibility ofpilot error,or

basically, human error. Determine what might be causing the human error

issue—fatigue, poor psychology, and so on—so that you can address the

situation and make the necessary adjustments.

Formula:

Win ratio=Number of winning trades÷Total number of trades

To get a percentage, multiply the ratio by 100.

Example:

60%= 60 ÷ 100

PAYOFF RATIO FORMULA

This is the ratio that tells you how many dollars you earn for every dollar

you lose. The higher your payoff ratio, the better. If you are consistently

earning $3 for every $1 you lose (3 to 1), you can be proud of yourself. If

you are earning $1 for every $1 you lose, you are breaking even and you will

need to determine how to improve this ratio. Very often, a sound money

management system will enable you to improve this ratio.

Formula:

Payoff ratio=Average winning trade÷Average losing trade

Example:

3 =$300÷$100

COMMISSION RATIO FORMULA

This is the percent of your profits that go toward paying commission to

your broker. When you are overtrading, the percentage of your profits that

goes toward paying commission will go up. This figure can be a barometer