There are many traders that develop their strategy win rate slowly. They believe that if the strategy won a couple of times that it is an ultimate weapon of victory, and it will work all the time. Let’s try and think about whether the win rate is the real deal and whether you should rely on it 24/7.
Don’t Follow the Crowd.
Truth be told, there are a lot of people who trade and do not always win. The majority of people who try to trade their own capital consistently lose money! So in an industry where the majority is not successful, it’s often wise to find someone who is successful and learn from them. The winning elite will tell you that your trading strategy win rate is not that important. At the same time, statistics, reward ratios, or edges will tell you that you must win over 50% of your trades to make money.
Random Probabilities: What Are the Odds of Scoring a Winning Trade?
Learning about statistics and probabilities can help gauge whether returns are likely to continue or if they happened randomly. Probabilities are like a good coin toss. A coin toss is a good example of how you can approach the trading market. With statistics and probabilities, the larger the sample size, the more accurate your results will be. As a result, if you’ve back-tested your strategy that brought you a win rate of 40%, don’t expect four out of every ten trades to be a winner. You’re more likely to hit that average over 100, or even 1000 trades!
However, please remember that determining whether superior trading is due to luck or skill often requires many years of observation, especially for longer-term investment strategies.
Average Winning Trade Vs. Average Losing Trade: What’s the Difference?
Have you ever heard the saying, “keep your losses small, let your winners run”? If your average winning trade is twice the size of your average loser, then you can get away with only winning a 3rd of your businesses just to break even. The smaller your losses and the larger your winners mean that you can have a lower win rate and still be profitable over time.
Well, if your average winning trade is the same or less than your average losing trade, then yes, you’d need to win more than 50% to break even. What does that say about the importance of having a high win rate?
All of the legendary famous traders that I’ve heard of had a win rate of less than 50%.
Trade Exit Technique
Most of the time, traders will always set a take profit level on their trades. Usually, these types of trades have a positive risk like reward ratio, meaning they aim to make more profit than the potential loss. However, they try to follow price with a trailing stop loss during a trend or price swing to capture as much profit as possible. If you follow this advice, you’ll have a chance to give yourself a substantial winning trade every so often, which will change your average winning business in your favor.
Drawbacks of Low Win Rates
Do you want to know a little secret? Having larger winning trades and lower win rates is the secret to the majority of profitable traders. However, low win rates have their psychological challenges. Mostly, small losses will have shorter emotional outcomes in duration than large profitable trades. For example, you won’t be as sad about $2 loss as you would be over a $200 loss. With this in mind, you should have a maximum drawdown that you’re comfortable with. If you’re not comfortable with your backtest drawdowns then you may wish to lower your risk allocation.
Trading takes patience and full belief in your trading!
Always make sure to remember that trading is a long term game. It’s not a way to make some quick cash! I hope this article has shed some light on the myth that a win rate of over 50% is essential to profitable trading.
If you want to know more about trading and its perks, go ahead and look through TraderCademy’s educational blogs!
Good Luck Trading!