Profitable CFD Trading Strategies
Understanding the relationship between two important ratios is the key to building a winning CFD trading strategy. The two key ratios are the risk reward ratio and the hit rate.
The risk reward can be calculated by averaging all the wins and dividing by an average of all the losses. The risk reward clearly displays how large your profits are when compared to your losses. The hit rate is simply how often you win and is a count of the winning trades divided by a count of all the trades.
Is Trading CFDs Like Winning Lotto?
Do you really believe that lotto is the way to make money? The behaviour of millions of people would suggest that it is.
The attraction of lotto is the low outlay or risk. If you lose it only costs you $10 and if you win the returns are potentially enormous, maybe $10 million. The risk reward of Lotto is 1 million:1. This is an excellent risk reward ratio and one you are very unlikely to find anywhere else.
However if it was that easy we would have all won lotto. This is not the case and while the risk reward is exceptional, the hit rate is lousy. Assuming that the lotto draw requires 6 balls out of 40 to win then the chance of buying the winning ticket are 3,838,380:1.
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.
So buying Lotto tickets is not going to make money based on the averages. This does not mean that you will necessarily win on the last ticket that you buy. You may be lucky and win on your first, twentieth, or two thousandth ticket, but successful trading is not about luck. Find a profitable opportunity and exploit that advantage.
Rugby Versus CFDs
The Crusaders have consistently won the Super 14 rugby competition in NZ managing to secure 7 wins over the last ten years.
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.
To trade CFDs successfully it is vitally important to have a strategy that overall you expect to win because the combination of risk reward and hit rate are in your favour. - 23311
The risk reward can be calculated by averaging all the wins and dividing by an average of all the losses. The risk reward clearly displays how large your profits are when compared to your losses. The hit rate is simply how often you win and is a count of the winning trades divided by a count of all the trades.
Is Trading CFDs Like Winning Lotto?
Do you really believe that lotto is the way to make money? The behaviour of millions of people would suggest that it is.
The attraction of lotto is the low outlay or risk. If you lose it only costs you $10 and if you win the returns are potentially enormous, maybe $10 million. The risk reward of Lotto is 1 million:1. This is an excellent risk reward ratio and one you are very unlikely to find anywhere else.
However if it was that easy we would have all won lotto. This is not the case and while the risk reward is exceptional, the hit rate is lousy. Assuming that the lotto draw requires 6 balls out of 40 to win then the chance of buying the winning ticket are 3,838,380:1.
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.
So buying Lotto tickets is not going to make money based on the averages. This does not mean that you will necessarily win on the last ticket that you buy. You may be lucky and win on your first, twentieth, or two thousandth ticket, but successful trading is not about luck. Find a profitable opportunity and exploit that advantage.
Rugby Versus CFDs
The Crusaders have consistently won the Super 14 rugby competition in NZ managing to secure 7 wins over the last ten years.
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.
To trade CFDs successfully it is vitally important to have a strategy that overall you expect to win because the combination of risk reward and hit rate are in your favour. - 23311
About the Author:
Jeff Cartridge is the author of Supercharge Your Trading with CFDs and created the website LearnCFDs.com Find the Best CFD Trading Books
posted by Mr. Forex at
3:10 AM
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