Who doesn’t like winning? We have been conditioned, from an early age, to believe that success comes as result of winning. Babies cry and cry and cry until they get what they want. They use crying as their strategic mechanism to win! Winning is used to impress others, positioned oneself somewhat above others. It is used to get that trophy, that promotion, that girl or boy, etc!
It is of no wonder that when we begin our trading journey, winning is the one thing that over consumes us traders and the one thing that usually causes us traders to fail.
How many times have you moved your stop loss with the hope that price would reverse, yet it leads to a higher loss than originally anticipated? yep! done that!
How many times have you gone back into a loosing trade to try and win against that particular trade? We called this mechanism “revenge trading” usually leading to even more loses! yep! done that too!
How many times have you over leveraged the account hoping to win big on that one trade you are so certain about? How many accounts have been blown up as a result of such things?
At a certain point we come to realize we might be the one factor that is depleting our trading capital. We begin the path of thinking into either building a manual rule based strategy or an automated one.
We spend hours and hours and more hours testing different indicators and strategies hoping to find the one setup that can gives us a high win rate percentage. We become obsessed about it, as if nothing else matters other than the following statement “If I can win a higher percentage of trades, I will be successful”
Win more, loose less, whatever takes! Most of the time such thinking leads to strategies with very wide Stop Loss or sometimes with none! Sometimes the equity itself becomes the Stop, terrible idea. The less opportunity I give the market to take me out, the less chances it will! WRONG!
What is wrong with winning you may ask?
There is nothing wrong with winning, but there is also nothing wrong with loosing. Focusing ONLY on winning is the problem. As a matter of fact, most winning strategies have a very low winning percentage, 20-30% at most! What is their secret? KNOWING TRADE EXPECTANCY
Do you know exactly how many winning trades it takes to cover the loses of one bad trade? or how many losing trades are you ahead at any point in time? Is your risk management strategy mathematically consistent? Meaning you always have the same average risk/reward? Without being able to answer any of those questions, it is very unlikely anyone will success in trading in the long run. Sooner or later the account is lost.
I would go as far to say that any trading strategy can potentially be a winning strategy, if the right risk management is used for such strategy.
Let me give you one example:
A trading strategy with a 70% win rate and a 4:1 Risk to Reward ratio is more likely to deplete an account than a trading strategy with 30% win rate and a 1:4 Risk to Reward ratio.
Lets say 100 trades took place. Risk/Reward is 10 pip multiplier
Strategy number #1: 70% Win Rate. 4:1 R:R – Earned 700 pips and lost 1200 pips. Leading to a Net loss of -500 pips
Strategy number #2: 30% Win Rate. 1:4 R:R – Earned 1200 pips and lost 700 pips. Leading to a Net Profit of 500 pips.
As you can see, win percentage is NOT the only thing to consider. Generally Speaking:
If your win rate is below 50%, your wins must be larger than your losses in order to produce an overall profit. The lower the win rate, the larger those wins need to be relative to the losses.
If your win rate is above 50%, your wins can be bigger or smaller than your losses. Bigger wins than losses is ideal. The higher the win rate, the larger the losses can be relative to the win size.
Trade Expectancy: know this well!
Trading expectancy is a calculation that shows what the typical profit is for each trade placed. If it’s negative, the strategy is a loser. If it’s positive, the strategy is a winner. The calculation combines how many trades are typically won with the average loss on losers and the average gain on winners. The calculation is as follows:
(Win % x Average Win Size) – (Loss % x Average Loss Size)