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BASICS<br />
would have earned about 200 pips<br />
after a series of ten trades:<br />
4 * 200 pips - 6 * 100 pips =<br />
800 pips - 600 pips = 200 pips<br />
If the second trader earns 25 pips<br />
with every successful trade but loses<br />
100 pips on every losing trade, then<br />
he would have reached break-even<br />
after ten trades:<br />
F1) Payoff Ratio Shows Reason for Falling Equity Curve<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
127<br />
122<br />
112 110<br />
105<br />
Average Profit Average Loss<br />
102<br />
98 96<br />
90 90 89<br />
84<br />
65<br />
60<br />
61<br />
52<br />
53 54<br />
50 49 47<br />
48<br />
44<br />
43<br />
78<br />
63<br />
60 60<br />
30<br />
51<br />
52<br />
94<br />
0<br />
8 * 25 pips - 2 * 100 pips =<br />
200 pips - 200 pips = 0 pips<br />
You can see why the majority of traders lose money trading, although they are right most of the time: The<br />
average profits (blue) are much smaller than the average losses (red).<br />
New traders are often impressed<br />
Source: DailyFX Research Department<br />
by the hit rate and are therefore<br />
often misled. Of course, it is exciting<br />
and it satisfies one’s ego if you earn<br />
money on most of your trades. But at the end of the day rates of 90 per cent or more. This seems appealing at first, but<br />
you should achieve a positive result, shouldn’t you there is no information about the profitability of the strategy.<br />
You should always keep this in mind – especially if you In other words: It is very simple to generate a high hit<br />
are confronted with trading strategies that claim to have hit rate. You trade without a stop-loss and close the position as<br />
Average<br />
61
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