Hi Folks!! I’m baaaaaaaccckk!! I hope everyone had a FANTASTIC week trading last week!! I’m SOO RELIEVED my weekly analysis and update didn’t lead us into a bunch of losing trades (just a few), because it’s tough to put yourself out there and make “predictions” when the market can very well do whatever it wants at any time. But that doesn’t mean for a second we just throw our hands up and take positions at random with good trade management (although with great trade management, one traders loss could be another traders win).

What it DOES mean though is there is no way to be right all the time and losses are absolutely inevitable.

Sooooo……….how right do you have to be??

Traders that have a very high win percentage make more than those with a low one right???

Easy answer?? Of course the trader that wins a bigger % of the trades they take makes more $$$. THINK AGAIN!

Back to the two traders with the win % question. Let’s say Trader #1 wins 90% of his trades. Bravo trader #1!!

What a sharp chap right? And trader #2 by comparison only wins 30% of his trades. What a loser!! Which one would you invest in?? If you can answer right away and say #1, please pay VERY CLOSE attention to the rest of this post.

For those of you who answered “you can’t tell”. Bravo! The question I posed was actually very much a trick question. It’s like asking “if someone jumps off a ledge will they die?”. Right away you know there is a BIG piece of information missing: HOW BIG IS THE LEDGE?? In our two trader’s case, there was some important data we would need before making the decision. Most importantly is average win vs. average loss SIZE, aka R/R (reward/risk ratio). Let’s see how that might work:

Trader #1 (our smart guy) wins 90% of his trades, BUT his losses are 100 pips and his wins are 5 pips.
Trader #2 “don’t quit your day job” only wins 30% of his trades, BUT his losses are only 5 pips whilst his wins are 100 pips…………See where I’m going with this??

Trader #1 after 100 trades: (95 wins X 5 pips)= +475 pips PLUS (5 losses X -100 pips)= -500 pips for a grand total of —- NEGATIVE 25 PIPS!! (huh?? He won most of the time!!)
Trader #2 after 100 trades: (30 wins x 100 pips)= +3000 pips PLUS (70 losses x -5 pips)= -350 pips for a grand total of —— POSITIVE 2650 PIPS!! (yes, A HUGE gain!!)

Same number of trades, GIGANTIC DIFFERENCE IN GAIN/LOSS. So the guy that barely ever won laughed all the way to the bank with his “losing” strategy and the guy who bragged about how accurate he was almost all the time, had to find a day job outside of trading to support his “habit” of losing money in forex.

So you see, win % is only important in regards to how big the gains and losses are along the way.  When I started trading, I used to believe that my whole goal was to be right all the time and never lose.  The longer I trade, I care less about the wins and more about the “structure” of the trades.  Because even someone who is wrong most of the time can gain very large $$$ in their account as long as they are going after bigger trades pipwise than they are risking.

And that new EA/system that promises you a 95% win rate just might not be the system you think it is when you see what the big losses are like compared to the tiny wins (we have all seen plenty of these).  In our own trading we must think about the quality of trades we are going after and what the potential for gains versus losses there are.  The closer your entry is to a major area that has a lot of protection behind it, will usually allow a smaller stop than entries based on momentum that may take place in between areas of protection.  The M2 system in particular many times offers you a great R/R as long as we look for trades that fit the bill.  A couple tips to better R/R:

1. Look for trades that have MULTIPLE areas of “protection” close to the entry point, rather than spread out  a ways behind it.  Sure it takes longer to find a trade that fits this model, but the smaller stop makes it much easier to grab a win that is double or triple the size of that stop.
2. Look for trades without much in the way of the trade.  Trying to “squeeze” a trade into the face of a major s/r can restrict gain sizes.  Try to look for trades with “open space” in the direction you want to trade (no major EMAs, Fibs, S/R etc.. close to entry in the direction of trade)

Overall, having a bigger positive R/R will do well for you psychologically too.  It takes the pressure off of having to win all the time to be profitable.  By keeping this in mind when you find a setup, you can not only make your trading less stressful, but more profitable too!

Author Omar Eltoukhy