Calculating Your Break Even Percentage
The break even percentage is a calculation that identifies the ratio of winning and lossing trades that gives a break even profit / loss. More specifically, the break even percentage shows the number of winning trades that are required for a trading system to neither make nor lose money. The break even percentage is a useful calculation because it can be calculated quickly, and immediately shows which target and stop loss combinations can be profitable.
Calculation
The break even percentage is calculated using the target and stop loss setting for the trading system in question. The target and stop loss can be represented by ticks (e.g. a 25 tick target) or by an amount of money (e.g. a $312.50 target). The result of the calculation is the number of winning trades that are required for a break even profit / loss, shown as a percentage.
•Calculation: (Stop Loss / (Target + Stop Loss)) x 100
•Example: 10 ticks / (20 ticks + 10 ticks) = 0.33 x 100 = 33%
Using the Break Even Percentage
The break even percentage is used to determine if a trading system provides enough winning trades to be profitable with various target and stop loss settings. When you are testing a new trading system, and have found the optimal target and stop loss settings, you can use the break even percentage to find out if the trading system can support those settings. For example, if the optimal target is 12 ticks, and the optimal stop loss is 10 ticks, the break even percentage will be 45%. This means that 45% of the trades that are taken must be winning trades in order for the trading system to break even. Any winning trades above the break even percentage are profit (i.e. they are not being used to offset losing trades).