How much does win loss ratio matter?

Discussion in 'Trading' started by SteveNYC, Jul 18, 2011.

  1. Long time ago, when I first started trading, I was focused on being right/winning. I wanted to win all the time. I tried to have a high win loss ratio. I wanted an A in trading like in school where if you get something like 94% of the questions right, you get an A and teachers and parents congratulate you.

    I hear/see traders talk about high win loss ratios like it's critical.

    But, what if you are only right 30% or less of time? (We know that in school, that is a solid F. You can't pass and graduate. You are a failure. A loser, if you will.)

    Scenario 1:

    You are right only 30% and you have a net profit of $30,000. You are wrong 70% and you have net loss of $7,000.

    Net result is a net net profit of $23,000 even though your win loss ratio was 3:7 which is way less than 50% win rate.

    Scenario 2:

    You are right only 10% of the time but have a net profit of $100,000 and you are wrong 90% of the time but have a net loss of $9,000?

    The second scenario has a much worse win loss ratio than the first scenario but has a much higher net net profit of $91,000.

    It seems counter-intuitive that decreasing the win loss ratio would result in a much higher net net profit.

    So, it seems that average $ profit to average $ loss ratio is more important than the win to loss ratio.

    Am I right?

    How much should one pay attention to the win loss ratio?

    I do know that a high win loss ratio is less painful than a low win loss ratio and might even be required to keep a sane mind. :D

    What do you guys and gals think?
  2. I think it's pretty clear it doesn't much matter in terms of identifying a strategy with a long-term positive expectancy, but it will have an effect on your equity curve/DDowns.

    ...and to your point, it's a psychological issue also - some people must have a high win ratio. To each their own.

  3. If you scale-in or pyramid as the market moves in your favour, you will have a higher average $ profit than the average $ loss per trade.

    Still, I doubt you can get away with being right just 10% of the time. When I was trading stocks, my breakeven was around 35%.
  4. All it takes is one big winner.