Two Numbers That Guarantee Your CFD Trading Success
Making of use of two critical measures of trading performance can dramatically improve your trading results. These two important measurements are the hit rate (winning %) and the risk reward.
To calculate the hit rate divide the number of profitable trades by the total number of trades. The risk reward is the average win divided by the average loss. The risk reward is a measure of how your profits compare to your losses, while the hit rate measures how often your strategy is profitable.
Lotto versus CFDs
Do you really believe that lotto is the way to make money? The behaviour of millions of people would suggest that it is.
Putting at risk just $10, you stand the chance to make $10 million when playing Lotto. This is excellent odds with your wins 1 million times the size of your losses giving a risk reward of $1 million to 1. This is an exceptional number and unlikely to be repeated anywhere in the investment world.
But there is a problem with buying Lotto tickets as an investment strategy. It is not the risk reward, but the hit rate. If a winning Lotto ticket requires 6 correct balls out of 40 possibilities, then the odds of winning are 3,838,380 to 1.
If we were to play Lotto 3,838,380 times then we would expect to win once and lose 3,838,379 times. This means we would win $10 million once and lose $38,383,790, overall losing $28,383,790.
Overall, buying Lotto tickets is not a profitable strategy. Luck will favour some people in Lotto, but successful CFD trading is not about luck, it is about exploiting profitable opportunities.
Rugby Versus CFDs
In the Super 14 rugby series in New Zealand the Crusaders has been a dominant team over the last ten years winning 7 of the 10 series.
In 2008 a gambler placed a $100,000 bet on the Crusaders to win a game at odds of just 1.08. This means that if the Crusaders won the gambler would have received a payout of $108,000, making a profit of just $8,000, but if they lost the gambler would lose $100,000. This is a lousy edge ratio with the risk reward ratio of 8 to 100 and a potential big loss for a very small gain.
Despite the lousy risk reward the probability of success is very high. If the probability was greater than 90% that the Crusaders would win then this could be the basis of a profitable strategy.
Calculating the probability of a team winning a game is not an easy task, but assuming the odds were 95%, then the gambler would win 19 times $8,000 and lose $100,000 just once. It could be that our gambler had a profitable strategy despite the lousy risk reward.
Successful trading is about following a profitable strategy and by using a combination of the hit rate and the risk reward you can ensure the strategy provides you with an edge. - 23162
To calculate the hit rate divide the number of profitable trades by the total number of trades. The risk reward is the average win divided by the average loss. The risk reward is a measure of how your profits compare to your losses, while the hit rate measures how often your strategy is profitable.
Lotto versus CFDs
Do you really believe that lotto is the way to make money? The behaviour of millions of people would suggest that it is.
Putting at risk just $10, you stand the chance to make $10 million when playing Lotto. This is excellent odds with your wins 1 million times the size of your losses giving a risk reward of $1 million to 1. This is an exceptional number and unlikely to be repeated anywhere in the investment world.
But there is a problem with buying Lotto tickets as an investment strategy. It is not the risk reward, but the hit rate. If a winning Lotto ticket requires 6 correct balls out of 40 possibilities, then the odds of winning are 3,838,380 to 1.
If we were to play Lotto 3,838,380 times then we would expect to win once and lose 3,838,379 times. This means we would win $10 million once and lose $38,383,790, overall losing $28,383,790.
Overall, buying Lotto tickets is not a profitable strategy. Luck will favour some people in Lotto, but successful CFD trading is not about luck, it is about exploiting profitable opportunities.
Rugby Versus CFDs
In the Super 14 rugby series in New Zealand the Crusaders has been a dominant team over the last ten years winning 7 of the 10 series.
In 2008 a gambler placed a $100,000 bet on the Crusaders to win a game at odds of just 1.08. This means that if the Crusaders won the gambler would have received a payout of $108,000, making a profit of just $8,000, but if they lost the gambler would lose $100,000. This is a lousy edge ratio with the risk reward ratio of 8 to 100 and a potential big loss for a very small gain.
Despite the lousy risk reward the probability of success is very high. If the probability was greater than 90% that the Crusaders would win then this could be the basis of a profitable strategy.
Calculating the probability of a team winning a game is not an easy task, but assuming the odds were 95%, then the gambler would win 19 times $8,000 and lose $100,000 just once. It could be that our gambler had a profitable strategy despite the lousy risk reward.
Successful trading is about following a profitable strategy and by using a combination of the hit rate and the risk reward you can ensure the strategy provides you with an edge. - 23162
About the Author:
Jeff Cartridge has been trading CFDs since they were first launched in Australia in 2002 and created the website LearnCFDs.com Find the Best CFD Trading Books
posted by X - Men @ 2:36 AM
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