Forex Strategy Evaluation Test

A strategy evaluation test can be used to assess whether a trading strategy is profitable or not.

Average trading strategies aim at a risk-reward ratio of 30% to 50% (Reward-Risk Ratio = Profit Targeted/Maximum Stop Loss * 100), which, if complemented even with a guaranteed winning percentage of 90% and trading 20 days a month with 5% trading capital each time (20 days * 5% of trading capital = 100% trading capital), results in an account balance that is lower than the trading investment, meaning that a trader has incurred losses. To earn profits, the account balance percentage should be higher than the trading investment of 100%.

For example, a strategy that aims to earn 10 PIPs with a stop loss of 30 PIPs has a Reward-Risk Ratio of 10/30 * 100 or 30%.

Now, with a risk-reward ratio of 30% and a winning percentage of 90%, along with trading 20 days a month each time with 5% of the trading capital, a trader will have an account balance of 27% {(30 * 90/100)%}, which signifies that a trader has incurred losses. It also means that if an investor started trading with $100, then his current account balance of 27% denotes that s/he has $27 in his trading account and has incurred a loss of $73.

A good strategy, on the other hand, aims to earn at least 60 PIPs with a stop loss of 30 PIPs, with a risk-reward ratio of 200% (60/30 * 100), which, when coupled with a winning percentage of 70% and trading 20 days a month with 5% trading capital each time, results in a positive account balance and profits.

That is, with a good trading strategy, one should have an account balance of 140% and a profit of 40% with a risk-reward ratio of 200%, with 70% chances of winning {(200 * 70/100)%}.