Risk Reward Ratio and possible payout methods
The Risk Reward Ratio (RRR) is a widely accepted tool for optimizing and subsequent measuring of the potential performance of a strategy over time. The Risk Reward Ratio itself is most often used by traders to determine where to place pending orders, i.e. stop-loss and take-profit.
However, the risk-reward ratio alone offers traders very little. It is next to impossible to properly analyze whether a certain strategie will be sustainable (and/or profitable) over time by using this indicator only.
Yes that’s right! When it comes to strategies, sustainable really does not have to be the same as profitable, because a strategy that moves around zero over time is sustainable but not profitable.
In order to be able to start working with risk and rewards, it is necessary to invite other indicators, such as: the number of profit / loss trades, the average profit from the trade, etc.
But Forex is primarily work and everyone expects an appropriate reward in the form of pay from work. The main question, therefore, is how to determine the size of the payout in forex so that the strategy remains sustainable and progressive over time?
Payout methods
| Indicator |
Value |
| Risk Reward Ratio (RRR) |
1:1 |
| Overall trade count |
10 |
| Overall loss |
8% (4 trades = number of loss trades) |
| Overall profit |
12% (6 trades = number of profitable trades) |
| Average loss from loss position |
2% (total loss/number of loss trades) |
| Average profit from profitable positions |
2% (total profit/number of profitable trades) |
| Strategy performance |
60% (amount of profitable trades/amount of all trades) |
Note: For easier understanding, the values from the table above will be used in all the following examples
-
Option - Regular payouts
This is one of the most popular ways that allows traders to collect money on a regular basis, which can then not only be used to cover fixed costs, but also in the case of a surplus, for example, for leisure activities.
How to calculate the amount of the regular payment:
Position size = $ 10,000
Average profit from position = (Total profits-Total losses) / Total trades = (12% -8%) / 10 = 0.4%
Payout coefficient = 0.5 (size of payout against average profit from position)
Payout = Size of the position * (average profit from the position * payout coefficient) = 10,000 * 0.2% = $ 20
Regardless of whether the position has made a profit or a loss, the payment is always made after the termination of each position. A well-set payout ratio together with long-term profitability ensures that the trading account will sooner or later reach not only its original amount, but will eventually grow over time.
Note: In the case of a regular payout, the payout ratio should never exceed 80% of the average gain on the position.
-
Option - Payouts when making a certain profit
Most likely, this is the easiest and at the same time quite an excellent way to collect profits. The payment is made only after the condition is met, i.e. when the trading account reaches a certain appreciation, in our case, for example, 20%.
Calculation of payout:
Condition: Current account amount> = Initial account size * (100% + Valuation required)
Initial account size = $ 100,000
Required evaluation = 20%
Payout coefficient = 0.8
Payout = Initial Account Size * Valuation Required * Payout Rate = $ 16,000
New Initial Account Size = (Initial Account Size * Valuation Required) - Payout = $ 104,000
Note: In order to maintain the progressive development of the strategy over time, the payout coefficient should never exceed 80%, i.e. 0.8.
-
Option - Payouts after completing a subjectively predetermined number of positions
Another payout system that does not look at the current performance situation, therefore, does not matter whether the account is currently in profit or vice versa.
Calculation of payout:
Initial account size = $ 10,000
Number of positions = 10 (number of realized positions after which the payment is made)
Average profit from position = (Total profits-Total losses) / Total trades = (12% -8%) / 10 = 0.4%
Payout coefficient = 0.75 (size of payout against average profit from position)
Payout = Initial account size * (average profit from position * payout ratio * number of positions) = 10,000 * 2% = $ 300
Of course, there are other ways to determine the size of payouts, but we have listed some of the most common and, in our view, the most used ways.