Ranking the best trading system in the marketplace and giving you transparency about risk and reward is a recurring concern at Anny.trade. Thru the 'Profitability index' we are taking evaluation metrics to the next level.
Profitability index = Achieved success ratio - Break even ratio
*Achived success ratio: the success ratio achieved by the signal
*Break even ratio: the required success ratio to break even in respect to the average risk/reward ratio of the signals.
Showing the success ratio is not enough. The success ratio is given by the ratio of signals that hit target 1 before stop-loss. Sometimes, even a success ratio of 90% is not enough to provide profit because recovering from a stop-loss requires several successful trades.
We also noticed some signal providers manipulate target 1 just to rank higher in the marketplace 🙄🤦🏻♂️🤦♀️
We need metrics that disclose the signal ability to provide profitability over good entries. The way we do this is by evaluating the risk/reward ratio in combination with the success rate.
If target 1 is 4% and the stop-loss is -4%, the R/R will be 1:1, and this R/R requires a success ratio above 51% to be profitable.
Now, if we decrease target 1 to, for example, 1% and keep stop-loss at -4%, the R/R will be 1:0.2. This R/R requires an 80% success ratio to break even.
- The greater the profitability index, the further away it will be from break-even, hence profitable.
- If the profitability index is negative, the success ratio achieved is not enough to meet break even.
The profitability index doesn't necessarily show the service that gives the most profit. It demonstrates the service that has the best profitability in relation to risk.
What it means for traders/signal admins
If you were not calibrating your R/R versus your success ratio already, now you have metrics for your convenience and backtesting at your disposal.
What it means for investors
What the numbers will show is that sometimes a success ratio of 60% can be healthier than one of 90%. In this scenario, you need to get comfortable with trades that hit the stop-loss more often but when the gains come, the recovery is fast.
Check this insight when opening your next trade:
Beyond technical analysis, the secret sauce to success is risk management.