What is Profit Threshold in FOREX Trading?

This is a little more complex, but important for money management over the longer term.

When you enter a trade, you will also want to enter a stop-loss and a take-profit order. Almost all traders seek a ratio higher than 1:1 between these two, with take-profit as the larger number for a profit/loss ratio. A 3:1 ratio means you risk one unit to make three units. For example, if your stop-loss (S/L) is 50 pips, your take profit (T/P) is 150 pips. Table below shows the basic profit/loss ratios for T/P and S/L pip values. Ninety percent of profit-loss ratios fall in the shaded area.

[caption id="attachment_12974" align="aligncenter" width="560"]Profit-to-Loses Ratios Profit-to-Loses Ratios[/caption]

Once you make 10 trades, you will know how many were winners and how many were losers.

Over the long haul, it is difficult to sustain more than 60 percent winners. Most traders are happy to get 40 percent winners. This can also be quoted as a ratio of winners to losers. For example, if out of 10 trades you have five winners and five losers, the ratio is 1:1. This is a relatively high ratio for winners to losers but relatively low for profit and loss. Table below shows the basic winners to losers ratios.

Winners-to-Losers Ratios

By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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