Hello everyone, Regardless of what methodology you use, be it very sophisticated or very simple, you can't escape the mathematics of expectancy. Your broker doesn't care about your method, win % or whatever. He simply tallies your wins and losses and it's either a red number or a black number. Simply put: "You need to make more money than you lose - on balance". Simple, right? Yet, I'm convinced this very fundamental truth is something many would be traders miss or at least don't pay sufficient attention to. Generally, making more money than you lose is achieved in one of two ways: a. A higher win % system where your average winner and loser each is around the same size, i.e., risk 1 to gain 1. Excluding commissions, a system with equal winners/losers would breakeven with a 50 % win rate. Including commissions, you'd need at least a 60 % win rate to get anywhere, but you're still not going anywhere fast. With a 70 % win rate it's looking better. These systems are typically associated with scalping and very short term trading. In practice, however, most scalpers seem to risk more than they stand to gain, i.e., risk 2 to gain 1. Such a system would need a 67 % (!) win rate just to breakeven - excluding commissions. Including commissions, your required win rate is around 80 %. Let that sink in... - b. A lower win % system where your average winner is at least twice your average risk, i.e., you risk 1 to gain 2. Compared to the prior system, this can actually make money with a 50 % win rate. If you can risk 1 and gain 10 or 20 - even better! Then your win rate can drop way below 50 %. This is more easily accomplished with swing trading, but can definitely work on any time frame. So, which system is better? How should you trade? I'd like to say both could work or are equally good, but I have to say I feel system b. is superior and a smarter way to approach your trading as it's really the essence of the timeless trading adage: "Ride your winners and cut your losses." I mean - who wouldn't want to gain more than he risked? Regardless, the important thing here is to really understand the math of risk/reward and what it is you're trying to do and how a few simple adjustments could make a big difference. Know that if you're scalping you probably need a VERY high win rate to get ahead. Can you achieve that long term? Know that if your win rate is lower, you need to make sure you put in a profit target at least twice your stop. It's really that simple. Why am I making this thread? Well, let's just say that I was embarrassingly slow to grasp this concept myself and I had some help to nudge me in the right direction. My focus was on methodology which of course is also important, but if you don't put the proper risk/reward metrics and risk management in place, no method will help you. You can't beat the market or outtrade the market by being a superior trader. But you can control your risk and you can let your winners run. I'm attaching two videos on the subject which are really, really good. GoodLifeTrader - Making Billions - Risk/Reward Risk Reward Part 2
The most important metric for a scalper IS high win rate. If he cannot achieve then don't scalp. For myself I find swing trading to be more difficult to achieve but we are all different.
Well, we all know what a "high win rate" means in theory. But in practice, it's a whole different story. Since you're a generous fella, wanna share your thoughts on where and how you get into the trade (entry criteria) and where and how you exit (exit criteria)?
Thought the most important metric was points, ticks or money. Win rate isn't the most important metric. Will never be. Because it's meaningless as a standalone The most important metric is Equity. Anything else is a derivative.
Lol yes of course $$ factors in. But if a scalper has an 80% to 100% win rate then profits are less of a concern if losses are not big. I'm just saying a scalper cannot make it if win rate is below 50%. Because he is going for small profits. Over and over.
Win rate is very important for a scalper not so for a swing trader. I know of no scalper that makes it overall with a win rate below 50%. But a swing trader can.
What's the H, D, W, M, Q expectancy of the SPY ? 0% / 0.03% / 0.16% / 0.68% / 2.01%. Easy. I said Equity is the most important metric, But equity is just another derivative. Equity = ~(Environment + Strategy + Execution) The shorter the timeframe, The less return per unit of risk. Not talking about anyone's ability to pick tops and bottoms, Just pointing out the natural tendency of financial instruments. Going with the elements, rather than against it. We can't square the market to our wishes. Just to say that A or B isn't the question. Both A and B might be legit / rubbish. An educated guess is the most appropriate. The key is to take rational risks ! Models & Estimates ...