Forex Strategy

Five Essential Ways to Gauge the Performance of your Forex Account

Good and bad forex traders cannot just be spotted from their gains and losses. The figures can be deceptive. Gauging the performance of your account is important in order to understand how your investment is progressing, and also to help you gain financial support from other investors.

To improve the performance of your account, you should create a trading strategy. The Commodity Channel Index is one of the most popular tools used to determine the level of risk involved in the buying or selling of currency. It helps investors know when a market is overbought or oversold; and therefore, likely to take a turn in the opposite direction.

Once this is done, you need to know whether you are making or losing money. The five methods highlighted next can help you gauge the performance of your forex account.

Standard Deviation

The arithmetic mean of your profits is just as deceptive as the statement of profits made. This is because the mean can be pulled up by a single major profit.

A clearer method of determining the performance of your account is the use of the standard deviation. This method shows the average deviation from the mean profit stated.

To calculate the standard deviation of your profits, follow these steps:

  • Find the variation of each individual profit or loss from the mean.
  • Square the figures you get.
  • Add up the squared figures.
  • Divide by one less the total number of figures in step 1. The figure you get now is the variance.
  • To get the standard deviation, find the square root of the variance.

With regard to this trading type trading, a good account should have a lower standard deviation.

The Number R

The number R is an important value that reflects the profit factor of an investment. It is used to show the average reward to risk ratio of an investment.

Simply put, it is the ratio of profits to losses over a long period. For example, if you have made average profits of 200,000 USD and average losses of 2,000 USD, your R figure will be 100 R. It is calculated by dividing profits by losses.

With a risk to reward ratio of 100 R, you can expect to make 100 USD for every dollar you lose. Of course, a higher R figure shows a good investment performance.

Sharpe Ratio

Developed in 1966, the Sharpe ratio has become a common standard of gauging the performance of money market accounts. The ratio gives a risk-adjusted return on your investment. It is, especially important in these investments since the market does not have a normal distribution of the expected returns.

To calculate the Sharpe ratio of your investment, you only need to replace the figures in this formula: (rp-rf)/ sd, where:

  • Rp is the return on investment.
  • Rf is the risk-free return.
  • Sd is the standard deviation of (rp-rf) over a period.

A high Sharpe ratio indicates that an investor has been getting good returns compared to the level of risk taken. Using a Sharp chart with a CCI indicator is also a good idea. A trader with a very high standard deviation will need to make more profits in order to increase the Sharpe ratio. Those with low standard deviations can have a high Sharpe ratio while making average returns.

Sortino Ratio

This ratio is similar to the Sharpe ratio, except for the fact that it uses the standard deviation of negative returns. Here, the risk is described as the failure to meet the expectations or to hit the mean profit level.

It is calculated using this formula: (Rp-Rf)/dsd, where dsd is the downside standard deviation. The rest of the symbols are just the same as those in the Sharpe ratio formula.

The downside standard deviation is calculated by setting the profits to 0 and finding the variance of the losses from the mean. These values are then used to determine the standard deviation.

Again, a high Sortino ratio indicates a good investment portfolio.

K-Ratio

The K-ratio is quite different from the above methods of gauging account performance. However, it still involves a comparison of risk and reward.

For the K-ratio, the numerator is the slope of a best-fit line of regression over a cumulative return series. A steep line of best fit indicates higher returns on investments. The denominator is the standard error of the line of best fit.

A K-ratio of 0 indicates that the investor is neither making a profit nor a loss. A positive K-ratio indicates the creation of profit, while a negative K-ratio indicates the creation of losses.

Conclusion

Gauging the performance of your forex account is just as important as forecasting the market. The methods described here are all suitable for the market and can help you determine the moves to make regarding your investments.

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