Does anyone track Profit per Risk?

Discussion in 'Strategy Development' started by aeliodon, Jan 4, 2007.

  1. Usually most traders track gains and losses. Lets say you use a 10 point stop on the YM and on one trade you lose -10 and the next trade you make +20. So your PF is 2.0.
    But you actually had a max risk exposure of -20 (if both trades got stopped out) and you ended up +10. So basically you risked -20 and made +10. And looking at it this way doesn't make you look as profitable as a PF of 2.0 makes you look - you're actually making less than your maximum risk exposure.
  2. Looking at it this way I bet even the most profitable traders simply end up making what they risk. If they risk 10%, they're likely to make 10%. Or better yet use numbers, if you risk 1500 points on the YM a year, you end up making 1500. No reward without risk.
  3. I suppose it all depends on your point of reference.

    Speaking of points, yours is a good one. It's helpful to examine a system or strategy from various perspectives or angles, if you will.
    Set it down in front of you and walk around examining from a birds eye view, then look back, then forward. Observe how it reacts in various situations.

    Picture it as multidimensional, then faceted with interacting parts, then as a single unit.

    My point being when I learned to view things with a new eye, it opened doors to greater possibilities. The focus of which is applicable to all things, financial or not.
  4. lescor


    Your point is incomplete without including win rate in the calculation.

    The formula for expectancy is:
    (avg win * avg win rate) - (avg loss * (1-win rate))

    Risk 20, make 10, but with an average win rate of 70%:

    (10 * .70) - (20 * (1-.70)) = 1

    The expectancy of your system is 1, meaning for every trade you enter, you expect to make an average of 1 point. All you need to do then is size appropriately based on your capital, risk tolerance and expected draw down.