Average Profit Factor and FX Trading

The average profit factor is just a simple formula that measures how many times the average profit in a Forex account exceeds the average loss.

Average Profit Factor should be going up.

Average Profit Factor: The bigger the number, the better.

The more significant the absolute number, the better. For example, if a Forex traders average gain in a managed account is $623.47, and his average loss on the same account is $287.20, the average profit factor is 2.17. Taking a quick glance at a traders APF, over hundreds of trades, is a quick and easy way to gauge a traders ability to cut his losses short and let his profits run. A good trader will have a average profit factor of greater then 1.  If the APF is below $0, stay away from that Forex manager. The more trades in an FX manager’s account, the more statistically relevant his average profit factor will be vis-à-vis his future performance.

When reviewing a track record, an investor can use the APF  to evaluate Forex managers track records quickly. Any trader whose APF is below 1 needs to do further work on his track record to warrant an investment. A currency trading advisor who has an average profit factor of greater than 2 is doing a good job letting his winning trades run and cutting his losing trades quickly.

Professional Investment Advisor

The Professional Investment Advisor is a person or entity that provides investment advice to their clients for a fee.

Investment Advisors have discretion over their client’s accounts, which allows them to make trades in their client’s accounts without their client’s permission when they are doing the trades.

Investment Advisors obtain their client’s consent to make discretionary trades when the account is opened.  Advisors often manage personal or corporate managed accounts, hedge funds and mutual funds, and some even publish specific trading advice in private publications and newsletters.

The tools of the Professional Financial Advisor include Charts, stock prices, a computer keyboard and eyeglasses.

Some of the Professional Investment Advisor’s Tools.

Investment Advisors manage funds in the Forex, securities and commodities markets.  They are also active in the derivative markets, such as the exchange traded and over the counter options markets. Advisors use their prior track records to attract clients. Financial Advisors that have track records that have historically high-returns, in combination with low volatility and drawdowns, are highly sought after by professional asset managers, funds-of-funds, and high net worth clients. Advisors charge a standard fee of 2% of assets under management and 20% of profits; however, top advisors can demand as much as 40% to 50% of profits.

It should be noted that some Investment Advisors do not charge a management fee to their Middle Eastern clients in order to be in compliance with local customs. Learn more about how to open a managed account.

Forex 101 for Beginners

Learn how the Forex markets work: Forex for Beginners


Currency Hedge Funds: Structure, Regulation and Management

Currency Hedge Funds

are similar to other hedge funds in the way they are structured, regulated and managed.

Currency Hedge Funds

Currency Hedge Funds vs Multi-Asset Class Funds

However, they are different from other hedge funds in the way that they are used by investors to add yield to their portfolios. Currency hedge funds, like most hedge funds, are structured as limited liability corporations; and registered as either on or offshore entities. Most foreign FX hedge funds are domiciled, registered, and regulated in the British Virgin Islands or the Cayman Islands. Onshore FX hedge funds formed and regulated in jurisdictions such as the United States or Great Britain. Regardless of where they are created and controlled, the managers of currency hedge funds can deploy the same management styles as mixed portfolio funds to maximize return on investment for their investors. Management styles vary but include discretionary, technical and quantitative techniques. These Forex hedge funds are also the favorite  stomping grounds of  emerging managers.  The advantage of currency hedge funds is that the returns on these funds are orthogonal to the output of multi-asset class hedge funds, which are usually heavily laden with equities and other highly correlated asset classes. The returns of currency funds are not related to each other, nor are they related to the yields of multi-asset class hedge funds.Investors will use currency hedge funds to offset the correlation risk in their hedge fund portfolios. However, it is important for investors to find managers who can create positive returns in the currency markets. Even though currency hedge funds do not have the customization and leverage advantages of Forex managed accounts, they are a powerful tool for professional investors to have in their arsenal of weapons when fighting the evils of today’s highly correlated markets. Also, unlike Forex managed accounts, currency hedge funds are only open to professional investors and are not sold to retail investors as a regular practice.

Forex Managed Account Profit Factor Calcuation

Forex Managed Account Profit Factor Calculation

Forex Profit Calculation

Forex Profit Factor Calculation

The profit factor, as measured in a Managed Account, is a calculation that shows how many times the average profit is greater than the average loss.  The profit factor is represented by a ration.  If the ration is positive, the fund should be making money.  The larger the ratio, the better the fund is performing.  For example, a  managed account program whose profit calculation is 2.0 is performing better than a fund whose ratio is 1.0.  See the profit factor calculation for Atlast Forex by clicking on the following link. A profit factor calculation that is above 1.0 is considered very good for FX funds that have long term track records.

Forex Hedge Fund

Some of the currencies traded by hedge funds.

Currencies that most hedge funds trade.

A Forex hedge fund is a corporation expressly purposed as an investment vehicle. High net worth entities, including companies and individuals, commingle their funds in the hedge fund vehicle to make specific investments.

Forex driven hedge funds typically use short-term strategies to buy and sell currency pairs and attempt to make a profit. Almost all Forex hedge funds use leverage to maximize returns.

Hedge funds are not as liquid as managed accounts, or self-directed accounts, and investors cannot liquidate their shares in the corporation on-demand. Typically, Forex hedge funds require that investors keep their money in the vehicle for at least 12 months.

Forex Volatility

Forex Charting, FX Volatility

Forex Volatility

Forex and volatility go hand-in-hand.  Forex volatility  is determined by the  movement of a Forex rate over a period of time.

Forex volatility, or real volatility,  is often measured as a regular or normalized standard deviation, and the term historical volatility refers to the price variations actually observed in the past, while  implied volatility refers to the volatility that the Forex market expects in the future as an implied by the price of the Forex options.   Implied Forex volatility is an actively traded options market determine by  the expectations of Forex  traders as to what real Forex volatility will be in the future.  Market volatility is a key component of a Forex traders evaluation of a potential trade.  If the market to too volatile, the trader might determine that the risk is to great to enter the market.  If market volatility is too low, the trader might determine that there is not enough opportunity to make money so he would choose not to deploy his capital.  Volatility is a one of the most important factors that a trader considers when he is deciding on when, and how, to deploy his capital.  If a market his highly volatile, a trader might decide to deploy less capital then if the market was less volatile.  On the other hand, if volatility is low, a trader might decide to deploy more capital because lower volatility markets might offer less risk.

Forex Risk Management

Forex Chart

Forex Risk Management

Forex risk management is the process of identifying and taking action in the areas of vulnerability and strength in a  Forex portfolio, trading or other managed Forex account.

In Forex options, risk management often involves the assessment of risk parameters known as Delta, Gamma, Vega, Rho and Phi,  as well as determining the overall expected return per Forex trade in the monetary loss to traders willing to forgo if the trade goes bad. Having good risk management can often make the difference between success and failure especially when dealing in the Forex  markets.