The Break-Even Curve in Trading
The break-even curve is essential to understand to become a profitable trader. It highlights the relationship between the win rate and the profit factor.
What is Break-Even Curve?
The Break-Even Curve is a valuable trading statistic tool because it shows what win rate and profit factor your trading system needs to have to become profitable. When your trading system is at break-even (at the blue curve), you don’t make or lose money. If your trading system performs below the blue curve you lose money.
You will make money from trading if you either have a high win rate or a high-profit factor. However, you can make good money from trading by having a low win rate and a high-profit factor. It all depends on which trading strategy you use.
It all comes down to the Risk-Reward ratio your trading system has. Your winning trades have to outperform your losing trades.
How to use the Break-Even Curve?
The Break-Even Curve determines if a trading system makes enough winning trades to be profitable. When trying out a new trading system and finding the best target and stop-loss settings, you can use the Break-Even Curve to figure out how many trades you need to win to break even. You will make money if the trading strategy performs above the blue line and you will lose money if the trading strategy performs below the blue line.
The risk/reward ratio and the win rate are concepts that go together. The risk/reward shows how much you risk compared to how much you make on each trade, and the win rate shows how many trades you win in percentage.
At the bottom of this page, you can set your win rate and profit factor and see how your trading systems scores on the Break-Even Curve chart.
The different zones
Unprofitable traders are in this zone. They lack a consistent strategy and often they have several losing trades in a row. Low win rate and lack of risk management make traders perform in this zone.
To be a profitable trader with a win rate below 50% you have to have at least a profit factor that is above the blue line.
The most common area for break-out trading systems. Most break-out systems have a very tight stop loss and a high target. Or to rephrase, a low win rate and a higher risk/reward ratio. These strategies can be hugely profitable.
To be in this zone requires patience and discipline! You have to be aware that you are going to lose more often than you win. You have to be able to stick with your trading plan and ensure you have enough risk/reward on each trade. Once you have that winning trade make sure to hold that trade until it hits your target!
This is the best zone to be in when it comes to the psychological aspects. You have a high win rate you feel confident and have consistent results. That helps your mind to stay calm and confident.
Zone 4: The Magic Zone
“The Magic Zone” has the highest win rate and target ratio. This area is “The Holy Grail” everyone wants to be in this zone. You are extremely profitable, confident, and consistent.
To be in this zone is a combination between trading strategy, discipline, risk management, and mental health. One way to achieve this is to use proven and consistent trading indicators and strategies. Because you can’t be in this zone without a great strategy or indicator.
Significantly few traders have come to this point, but all of them have been highly rewarded.
Try it out yourself.
Fill in your win rate and profit factor for your trading strategy or setup and hit “Refresh” and a green dot will appear on the chart. The dot represents in which zone your trading strategy is performing. Are you in “the Magic Zone”? – congratulation!