Calculating Your Trading Break Even Percentage
The trading break-even percentage is a useful trading statistic because it can quickly show how many trades you need to win—using various stop-losses (risk) and targets (reward)—to break even. "Break even" means you neither make nor lose money. If you win more trades than the break-even percentage, your trading will produce a profit. If you win fewer trades than the break-even percentage, you will lose money trading.
Trading Break-Even Calculation
The break-even percentage is calculated using the target and stop-loss settings for the trading strategy in question. The target and stop-loss can be represented in ticks (futures), pips (forex), cents (stocks), or by an amount of money ($100 stop-loss and $300 target for example). The result of the calculation is the number of winning trades that are required for a break-even scenario, shown as a percentage.
If you don't always use the same stop loss and target on each trade, then use your average win and average loss over many trades. The average loss is equivalent to your average stop-loss, and the average win is equivalent to your average target.
- Calculation: (Stop-Loss / (Target + Stop-Loss)) x 100
Assume that you trade futures and utilize a 10-tick stop-loss and a 20-tick target. Your break-even percentage is 33%. In other words, you need to win a third of your trades to avoid losing money (not including commissions).
- Example: 10 ticks / (20 ticks + 10 ticks) = 0.33 x 100 = 33%
Assume you trade the same stock each day, typically risk $0.08 per share and place a target of $0.22 per share. For this strategy, you only need to win slightly more than a fourth of your trades to break even. If you win more than that, you will produce a profit.
- Example: $0.08 / ($0.22 + $0.08) = 0.266 x 100 = 26.6%
Using the Break-Even Percentage
The break-even percentage is used to determine if a trading system provides enough winning trades to be profitable with various target and stop-loss settings. When you are testing a new trading system and have found the optimal target and stop-loss settings, you can use the break-even percentage to find out how many trades you need to win to break even. If you win more trades than the break-even calculation dictates, then you will produce a profit. Win fewer trades than the break-even calculation says, and you will lose money with that trading strategy.
For example, if the optimal target for your strategy is 12 ticks, and the optimal stop-loss is 10 ticks, the break-even percentage is 45% (10 / (12+10)). This means that 45% of the trades that are taken must be winning trades for the trading system to break even. Any winning trades above the break-even percentage are profit.
Two related statistics are the risk/reward and win rate. The risk/reward is how big your risk is relative to your profit on each trade, and the win rate is how many trades you win expressed as a percentage. These statistics can be used in addition to the trading break-even calculation.
Unrealistic Targets Produce Misleading Break-Even Percentages
At first, it may seem ideal to set your target much higher than your stop-loss. That way, you'd only need to win a few trades to break even, right? Unfortunately, it isn't that simple. If your target is so large that it is never reached, then you will have far fewer winning trades, and the system will lose money. Therefore, when building a trading system, come up with your stop-loss and target levels first, then calculate your break-even point.
The ultimate goal in trading is not to simply break even, although beginners may be satisfied with that outcome. To trade profitably, however, you need to win more trades than the break-even percentage. The break-even percentage is meant to be a low bar to jump over, not a goal to aspire to.