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Monday’s video – As good as it gets?

Charlie looks at a recent email he received from a trader and details why an 84% win rate strategy may not be optimal….

Hi this is Charlie giving you Monday’s video.

What I wanted to go through very briefly was that I had an interesting email come through from a trader who’s on our database who’s probably going to be watching this. I’m not going to mention his name.

What he’d done is back testing one of our strategies over a period of time. He’d tested this strategy of mine and he’d come out with about a 70% success rate. That was giving him a 1:1 risk to reward ratio. That means that if you’re risking ten pips then you’re making ten pips on your winners, and if you’re right 70% of the time, you’re making money.

That’s not bad, actually it’s pretty good.

So I got an email from him, and he won’t mind this, but I think it’s a good learning point, that’s why I’ve raised this.

He said he’s been doing some more work on this, because he was trying to increase his win rate. He said that what he’d done is manage to get the success rate up to 84%. This is all on testing and it’s tested over 135 trades. He said, while he’s building his confidence, as a new trader, should he go for the higher win rate?

Interestingly, with a higher win rate, what he’s actually doing is 1:0.5 risk to reward ratio. So if he was risking ten pips he would only be making five pips on the trade.

He said that the strategy increases the win rate to 84% but it actually makes less money than this one, which is not surprising. He said, in order to increase my confidence, should I be going for this 84% strategy because it wins more often?

I thought, it is so typical and true of new traders that they want to be right as much as possible, and that’s what this is all about. It’s a confidence thing that we are all indoctrinated to want to be right and it is right throughout life. In school you’re taught to always want to be right, all the way into work.

When we come to trading, we have to accept being wrong a fair percentage of the time. A lot of people who are new to trading don’t want to accept being wrong. So they’re constantly searching for very high win rate strategies even if they actually make them less money.

He actually was looking to risk ten pips to make five, which is, by the time you take spreads and slippage into account, it’s going to be even worse than that. So I said no, do not look to do that.

So that was my advice. I just thought it was interesting, the mindset of a newer trader. What you need to do is try and transcend that mindset and embrace having losing trades. There’s nothing wrong with them because it’s all part and parcel of trading.

What’s more important is, are you making money? Rather than winners versus losers.

So just bare that in mind, you don’t have to be a high success rate trader in order to be profitable.

Talking of that, on my Friday videos it always looks like I’m always winning, and I do appreciate that I seem to have good little spells sometimes on a Friday, and you know that I do have my losing Fridays as well, but I can go for quite a few Fridays with no losers. Maybe this week I will have a losing Friday.

You have to believe me that I have more than my fair share of losing trades as well. That’s just part of trading. I can go through the week and have my fair share of losses, but the most important thing is that when I have my winners, that my winners are going to exceed my losers.

Don’t get wrapped up in win rates, look at profitability, that’s what’s most important.

I’m going to leave that with you, there’s not really too much to say at the moment.

I’ll see you on Friday.

 

10 Comments

  1. Kevin-Reply
    June 1, 2015 at 12:25 pm

    I totally agree with this, I’m 6 months in to trading and I’m finally getting more comfortable with losing and accepting it’s all about risk to reward, in fact I’ve learnt more from losing than winning, the winners you tend to file away, the losers you analyse and learn how to trade better. I expect to get a 84% win ratio you end up not taking the riskier trades and only going for the genuine winners, the riskier ones somtimes turn out much better!

  2. Dave-Reply
    June 1, 2015 at 12:51 pm

    Great video and good advice – thanks Charlie.

    I actually recently bought a strategy from a fairly famous trader and found that the strategy has a 90% win rate but that the risk / reward ratio is absolutely awful. It’s starts as 2.5:1 risk:reward and then you add progressively to losing positions a maximum of 5 times and actually increase the position size each time as well. You win 90% of the time but if you end going in 5 times at the increased position sizes that this well-known trader suggests you end up on approximately 85:1 ratio. The idea is that you recover all the loss on the first trades with the later trades but needless to say – you only need the final trade to go against you once to blow your whole account. Definitely not going to use his strategy.

    • Charlie Burton-Reply
      June 1, 2015 at 1:06 pm

      Wow! May I ask who it is from?

      • Dave-Reply
        June 1, 2015 at 6:42 pm

        Yes of course, it was from Boris Schlossberg and Kathy Lien at bkforex.com.

  3. Phil-Reply
    June 1, 2015 at 4:07 pm

    Hi Charlie,

    Another great video, really admire honest approach to trading. Just had a question was hoping you might be able to shed some light on. I currently work regular 9-5 job so my time in front of the computer doesnt allow me to tade intra day like i would like to do. I currently only trade one index as have been told to know one well than know lots not very well! Given the fact that I am not in front of the screen all day and my trades wouldnt be intra day, sometimes I might not come across a setup for a while and oftentimes when this is the case, I might enter when not optimal. Would you advise perhaps looking at one or two more indices so as to increase the likelihood of coming across a setup? (or should i just be more patient!).

    Thanks,

    Phil

    • Charlie Burton-Reply
      June 1, 2015 at 4:21 pm

      Hi Phil. Good question and it’s a good point regarding focus. Considering you are swing trading then yes it’s fine to trade more than one market.

      Charlie

  4. Karl-Reply
    June 1, 2015 at 6:04 pm

    Hi Charlie – Great vid! Assume a lot of new traders have this dilemma too… Good to know I’m not the only one… Plugging away with the 1:1 set up, made my (modest) target for the last 6 consecutive days 🙂

    • Charlie Burton-Reply
      June 1, 2015 at 6:12 pm

      Excellent stuff

  5. Socaci-Reply
    June 2, 2015 at 6:22 am

    Hi Charlie,
    What is your win % ? I am now working with a strategy 50% win with 1:4 R-R, is tending to be less then 50% in time but i hope that i’ll work it out

    • Charlie Burton-Reply
      June 2, 2015 at 7:00 am

      Mine varies depending what style of trading I am doing as I don’t use a specific strategy as such, just variances on the same theme. But I tend to have a higher win rate for intra-day (above 50%) and a lower win rate for swing trading as I look for larger risk to reward with that.

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