Calculating Your Trading Break Even Percentage
The trading break even percentage is a useful trading statistic because it can be calculated quickly, and immediately shows how many trades you need to win--using various stop losses (risk) and targets (reward)--in order to break even. Break even means you neither make or 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) or 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 profit/loss, 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, utilize a 10 tick stop loss and a 20 tick target. Your break even percentage is 33%, or you need to win 1/3 of your trades in order not to lose 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 1/4 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%
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.
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 many 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 is 12 ticks for your strategy, 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 in order for the trading system to break even. Any winning trades above the break even percentage are profit.
Final Word on Your Trading Break Even Percentage
At first, it may seem like a target way bigger than your stop loss is ideal, since then you only need to win a few trades out of many to break even. It is not that simple, though. If your target is so far away that it is never reached, then you are very likely to have almost no 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 when starting out that may be a satisfactory outcome. In order to trade profitably, you need to win more trades than the break even percentage.