“It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong” – George Soros. This quote sums up perfectly what trading is all about.
Beginner traders don’t want to experience the pain of loss, so they search for trading systems that have a high percentage of success and regard the win rate as an important metric. Well, the win rate is totally irrelevant. You can be unprofitable with an 80% win rate and profitable with a 30% one.
How? Well, if you win small on 8 trades and lose big on the remaining 2, you may be breakeven or even down. Risk management is key here. Most successful traders are right on half or a bit more of their trades. As Peter Lynch once said “in this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten. Your goal is to take good asymmetric bets and cut off those that are not working out as expected. That’s all.
This wrong conception about the win rate leads new traders to being scammed with trading strategies that promise a very high win rate and they then jump from one strategy to another as soon as those strategies miss their expectations. This is a losing and dangerous cycle that ends in a big waste of money and eventually a drop out of trading.
Losses are a natural part of trading, and you just have to know how to deal with them. Unfortunately, in the beginning you can’t have faith in your abilities to generate consistent positive returns just because you’ve never done that. You should just learn how to trade and focus on trading well rather than trading for money.
Once you achieved a level where you see that you have positive returns over at least 6-12 month horizon, you will know that you can do it and you will have faith in your abilities. That will help you immensely because you will know that even if you have short term setbacks, your long term success won’t be affected.
This article was written by Giuseppe Dellamotta.