Pro-Trading-Profits: Strike Rate Ratio

The Strike Rate Ratio is designed to answer one basic question about a service's performance:

"Given the average size of a service's winning trades compared with the average size of their losing trades, what does their strike need to be for them to be profitable?"

In order to answer this question we need two pieces of data:

We need to know their Current Strike Rate (CSR);
And we need to know their Required Strike Rate (RSR).

The Required Strike Rate is effectively their breakeven point - given how much they generally lose when they're wrong (their average loss per losing trade) compared with how much they usually win when they're right (their average gain per winning trade) how often do they need to be right to breakeven?

We would usually have a service's Current Strike Rate as it is part of our normal analysis. Their Required Strike Rate needs to be calculated separately, as shown below.

Required Strike Rate

Formula

The formula to calculate a service's Required Strike Rate, where AW = average gain per winning trade and AL = average loss per losing trade is:

RSR = (AL / AW) / (1 + (AL / AW))

Example

One of the services we track has an average gain per winning trade of 15.8%. Their average loss per losing trade is -7.2%. Using the above formula, we would calculate their Required Strike Rate as:

(7.2 / 15.8) / (1 + (7.2 / 15.8)) = 31.2%

What this is saying is that, for every 3 trades that they do, they only need to get one right to breakeven, given that their average gain each time they win is approximately double what they lose when they're wrong.

Strike Rate Ratio

Formula

Once we know a service's Required Strike Rate, we can then calculate their Strike Rate Ratio using the following formula:

Strike Rate Ratio = Current Strike Rate / Required Strike Rate

Example

Using our current data, the calculation for the ratio is:

71.0 / 31.2 = 2.31

Given that a breakeven SRR is always 1.00 (where the CSR and the RSR are both the same), a SRR of 2.3 tells us that their CSR is more than twice what it needs to be in order for the service to maintain its profitability. Generally, you would want a service to have a SRR of about 1.50 - anything less than that and the margin for error is too thin.