Win/loss ratio

How good and how many

How good does your win/loss ratio have to be to make a living from trading? And how many contracts do you need to trade to make your target?

Your win loss ratio is often described as a percentage of winners. Let's say that you have a strategy that has 60% winning trades. That means that 60 out of every 100 trades will be closed profitably.

There's a missing vital ingredient here. What is the average win and average loss? If you gain 0.50 points on average for each winner and lose 1.50 points on average for each loser then this is not a winning strategy.

Let's start off with something simple. Let's assume that the 60% winning strategy that you employ has an average win and loss of 2 points for each trade. Let's also assume that we're trading the E-mini S&P future (the ES). Let us also assume for the sake of simplicity that you execute 5 trades per day and you take 2 trading days off each month as vacation so that you execute exactly 100 trades per month.

A simple calculation shows us that your profitable trades yield 120 points (60 x 2.00) and your losing trades cost 80 points (40 * 2.00) leaving you with a net 40 points per month.

What about commission? Let us assume that it costs you $6.25 per round trip which is not an unreasonable assumption and conveniently translates into one eighth of an ES point. So 100 trades in one month will cost 12.50 points on the ES.

That leaves you with a net profit of 27.50 points which at $50 per point is $1,375 per contract per month traded. Multiply this by the number of contracts you trade and you have an expected profit per month or benchmark against which you can measure your actual performance.

If you're doing a viability study into trading for a living then you need to take off a certain amount per month for running costs (computer replacement, data feed, education, DSL etc.). A figure of between $3,000 and $10,000 per year is normal. Let's assume $3,000 for now.

So now we know that our net income after commissions is $1,375/month/contract (slippage we assume is calculated into the 60% win ratio). This gives us an annual income of $16,500 per contract which means that we need to trade 6 contracts in order to earn $99,000/annum.

After we take off our $3,000 of costs we're left with $96k profit.

Assumptions

What assumptions have been made and what do you need to do to realistically achieve this?

• You trade 20 days a month
• You execute 5 trades a day
• Your win ratio is 60%
• Your average win and loss on each trade is 2 points
• Your commission is $6.25/round trip
• You trade 6 contracts per trade

So we've now boiled this down to a business with a business plan and profit percentage. All we have to do now is to execute the trades day in and day out and make sure that we achieve or better our win/loss ratio to remain profitable. After that it's just an exercise in volume.

Daily Monitoring

I keep a spreadsheet to show my expected/budgeted performance versus my actual and keep a careful eye on how I am doing each month. Using a spreadsheet makes it easy to calculate everything from your daily trading log and summarize it for quick reference on how you're doing and what needs attention.