Your system’s win rate (how often you win) certainly matters (if you are wrong on all trades you will definitely lose) but the other part that most traders ignore is the winners and losers average size.
It is common for new traders to assume that making money as a trader is about being correct on all or most of your calls. However the reality is quite the opposite.
Let’s say you lose 1 point if you are wrong but win 3 points if you get it right, then you will become a profitable trader, even if you are more than 50% wrong.
This type of system with favorable risk/reward should be something traders especially aim for beginners.
Conversely, traders often aim for a high win rate system (they try to be perfect on all their trades), which leads to the following scenario.
Because a trader wants to be right, instead of cutting losses in time, he decides to hold or average a loser and “fight price”.
He wins this fight and says, “I knew this was going to come back.”
He feels smart because he has got approval from the market.
However the next time he tries to do so, the price doesn’t come back and he blows up the account or becomes a bag holder. It is also common for traders who often find winners to sell fast.
So when they win, they win 1 point but when they lose, they lose 5 or more. This way they have 80-90% win rate but they are not profitable.
Most successful trading is doing the exact opposite. You have to cut losses fast and let the winners run and not vice versa.
That’s why this game isn’t about being right, it’s about getting out as quickly as possible when you realize you’re wrong.
Your trading will start when you stop so much about being right and instead start exiting as quickly as possible.
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