When testing an FX strategy or system, it is tested to find out whether it is profitable and its trading results are consistent. To assess the testing results properly, you need to use the objective evidence-based parameters or statistics. Beginning traders sometimes believe that there is some single magical statistical parameter that should be optimized. In reality, this is not the case as you have to work with a complex set of interconnected values to find a successful and persistent trading method. It is not sufficient to develop a trading system with a huge win rate to succeed here. A huge win rate is just one part of the system's profit expectancy, which by itself is also not the only important parameter.
The practical way is to assess the whole lot of the testing statistics as they all matter to your account's survival. If you regularly and correctly analyze the trading statistics, you will be able not only to choose the right trading methods but also to tweak your strategy for better results. Below, you can see the list of important statistical metrics that you could consider when dealing with the results of your Forex backtests and forward tests (preferably, on demo accounts).
- Win rate (or win/loss ratio) — number of winning trades divided by the number of total trades for the period. Of course, every trader would like to get high percentage of profitable trades and low percentage of losing ones. It is OK to set high win rate as one of the main objectives, but you have to remember that there are other important Forex statistics to work with.
- Average win/loss — calculated as a simple arithmetic mean: sum of profits for the period divided by the number of winning trades and sum of losses divided by the number of losing trades. Obviously, traders should aim for higher average profit and lower average loss. Together with the win rate, these two statistical gauges determine whether your strategy is profitable or not.
- Expectancy — calculated win rate multiplied by average win minus loss rate multiplied by average loss. It tells you how much you can expect to earn from a single trade on average. Increasing this parameter as high as possible is very important.
- Average number of trades per period — it is one of the simplest statistical parameters, but it can give you a rough estimate of how active your trading is going to be; it is also crucial in setting an optimal risk percentage per trade.
- Net pips — or net profit in pips, is how many pips your trades have earned it total (gross pips minus the loss pips). This statistics is very popular on Forex forums and among industry's marketeers. However, it is a very flawed stat — pips alone say little about the strategy overall and if different currency pairs (or other trading instruments) get mixed here, it becomes totally useless. Net pips has its place in statistical analysis of FX strategies, but this place is niche and definitely not the leading one.
- BE trades (or breakeven positions) — neither losers nor winners, BE trades might seem unimportant to new Forex traders. In reality, they can tell you a lot about your trading style — do you tend to cut your profitable trade too early? do you trail your stop-loss too tightly? are you afraid of losing trades? Besides, breakeven trades often incur commission and swap losses, which should be properly accounted for in your trading method.
- Longest losing streak — describes how many losing trades in a row you had during the period and what the total size of these losses was. It can tell you how bad your strategy can actually get and prepare you for bad periods.
- Breakdown of wins/losses by instrument — not all currency pairs will produce the same trading statistics. Analyzing your trades across different trading symbols will help you to determine what you are doing right and wrong and with which trading instrument.
- Risk of Ruin — a calculated probability of wiping your account by employing the analyzed Forex trading strategy. There are several formulas to calculate this statistical measure and also a more accurate method — calculation by modeling. Risk of ruin is one of the most important statistics for traders as no one wants their trading balance zeroed by an unfortunate streak of poorly controlled losses. Every trader should strive to make this number as low as possible.
One could argue that there is no need to optimize all of the mentioned statistics — after all, it is possible to remain profitable even if some of them are not as good as you would want them to be. However, a coordinated effort to improve your trading will result in an overall advancement in many of the metrics listed here.
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