Question

Assume you have a £1 million with 1% risk and wish to place a 7% stop loss. A security you are following is trading at £22. Assume that you win 25% of the time and have a gain of 18% each win. When you lose, you lose 5%. Determine the average win per trade in £pounds.

a. £36,000
b. £45,500
c. £54,000
d. £61,000

Answer 1

The average win per trade is £45,000, calculated by multiplying the 18% gain on a £1 million trade by the 25% probability of winning.

Step-by-step explanation:

To determine the average win per trade in pounds, we need to consider the probability of winning and the gain associated with a win. Given that the probability of winning is 25% (or 0.25) and each win provides an 18% gain, we would calculate the average win per trade using these values.

Let's assume the entire £1 million is used per trade. An 18% gain on £1 million is £180,000. However, given that you only win 25% of the time, the average win per trade would be the win amount multiplied by the probability of winning:

Average Win = Win Amount × Probability of Winning
Average Win = £180,000 × 0.25
Average Win = £45,000

Therefore, the average win per trade in pounds is £45,000, which corresponds to option b.