Definition
Average Loss is the mean amount lost on your losing trades. It provides insight into the typical downside when trades don’t go as planned.
Formula
Add up all the losses from your losing trades and divide by the number of losing trades.
Average Loss = Total Loss from Losing Trades / Number of Losing Trades
Example 1:
- Total losses from losing trades: $9,000
- Number of losing trades: 30
- Calculation: Average Loss = $9,000 / 30 = $300
- Interpretation: You lose an average of $300 per losing trade.
Example 2:
- Total losses from losing trades: $12,500
- Number of losing trades: 25
- Calculation: Average Loss = $12,500 / 25 = $500
- Interpretation: A higher average loss indicates larger losses per trade.
| How It Can Be Used | Limitations |
|---|---|
| Setting appropriate stop-loss levels | May be influenced by rare, large losses |
| Evaluating the cost of unsuccessful trades | Doesn’t show how often losses occur |
| Adjusting strategies to reduce average losses | May not predict future performance under new conditions |
In Practice
Understanding your Average Loss is crucial for risk management. Aim to keep it as low as possible to minimize the impact of losing trades on your overall performance.
