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. 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.
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 it is not how much you win that is important when playing lotto it is how often do you win. An awesome risk reward is coupled with an awful hit rate. To win lotto if you require 6 from 40 balls then your probability of success is 1:3,838,380.
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.
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.
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.
Article Source: FxTradingStock.com
About the Author
Jeff Cartridge has been trading CFDs since they were first launched in Australia in 2002 and created the website LearnCFDs.com
by: Jeff Cartridge
Total views: 159
Word Count: 508
Date: Fri, 24 Jul 2009
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