Forex Profit Loss Index

Continuing the spotlight on backtesting, there are 3 different indexes that can be calculated in your backtested results or your live trading results to give an indication of the chance of success.  I mentioned 1 last week, Buy and Hold.  The other 2 are the risk/reward index and the profit/loss index.  

Calculating the profit/loss index gives you a general idea of the success your trading or trading system is having.  A simple example is best suited to illustrate this. 

1. Calculate all of your winning trades in dollar amount.  For this example, I had 5 profitable trades, each $90 for a total of $450.  
2. Calculate all of your losing trading in dollar amount.  For this example, I had 7 unprofitable trades with the following losses: $ -45, -30, -110, -25, -30, -90, and -55.  The total losses amount to $385.
3. Subtract the losing dollar amount from the winning ($450 - $385 = $65)
4. Profit/Loss index =  ((Winning trades + Losing trades)  ÷ Winning trades) * 100

So the profit/loss index for my example would be calculated as such: ($65 ÷ $450) * 100 = 14.4 %

The profit/loss index for this example is 14.4%.  The following key translates these results into something more meaningful:

+100          High Profit/No Losses

+50            Profits > Losses 

0                Profits = Losses

-50             Profits < Losses

-100           No Profits/High Losses

Using this key, the above example would be on the lower end of the 0 - +50 range, not great.  Ideally, you want the index as close to 100% as possible.  If your index is negative, you're losing more than you make.  If your index is 100%, your perfect.

On the surface, this calculation can seem kind of useless but what it does best is give a clear meaning to all of your profits and all of your losses.  How would you otherwise interpret a number like $65?  Yes, it's a profit but in the example case, not a very good profit.

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