# What a trader needs to know to improve profitability

What am I working on the most to improve my trading profitability?

A question, some would think, answered with reference to strategy or method, but it is not that, as significant as it is.

It is regardless of a traders methodology.

What makes a massive difference to profitability is knowing these three inputs: R, win/loss percentage and per cent of account balance risked per trade.

Professional poker players calculate ‘risk of ruin’ (ROR) as a measure of probability, and it applies equally to financial trading.

To calculate our ROR, we need all three inputs, and the smallest of tweaks can make a significant difference.

It applies equally to financial trading.

#### The measurement of R

What is R? This refers to reward/risk.

When entering a trade, a professional trader will immediately place a stop loss position coincidental with the trade position.

In the above instance, if our stop is activated, that would be recorded as a -1R trade. (As long as each entry has the same risk amount). If, however, our deal is profitable and we exit at a regular price equal to our stop price position, then we achieve a +1R. On the other hand, if we deliver twice the target distance as compared to the stop position than we would record a +2R, and so on.

Knowledge of the R achieved is essential as a measure towards determining ROR.

#### Win/loss percentage.

Win/loss shown as a difference in wins compared to losses shown as a percentage.

In ‘Market Wizards’ (where Jack Schwager interviews top traders) Schwager gives the ‘wizards’ two choices. A strategy with a high win/loss ratio and a low R, or a small win/loss strategy with a high R.

I forget the exact wording as it’s a while since I read the book; however, I do recall that all ‘wizards’ took the latter and without hesitation. Most retail traders would probably plump for the former. (If nothing else this indicates the power of R).

Win/loss is better if expressed as a percentage of each strategy traded to provide a complete understanding of the underlying ROR.

How many trades are needed to give a measurable win/loss? There is no exact answer, but my guess would be at least 100 and somewhere between 500 and 1000 measured trades would be better. Of course, these can be a demo or simulated trades; however, ‘live’ trades are always going to be a truer confirmation of a traders skill level.

#### Account balance risked per trade.

Getting account balance percentage wrong is probably why most traders burn their accounts at some point (often early) in their trading careers. I was no different.

In almost all books or trading courses, the explanation of ‘per cent of account balance risked per trade’ is weak. Thus leaving it open to individuals own interpretation resulting not infrequently to a ruinous outcome.

Yes, trading courses point out the need to trade as a percentage of the account. Maybe one or two per cent is provided as a loose example. In reality, it is much more exact than this.

Without having each of these measures of R, win/loss and per cent of account balance risked per trade, it is not possible to calculate the all-important ROR.

Only when we have all three accurately available can we know what we need to tweak to improve our profitability.