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.