Losing For Winning: Why Winning Trade Percentages Are Meaningless
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Well, maybe meaningless is too strong of a word. But, technically when you’re shopping for Automated Trading systems, the percent of winning trades may not accurately assess the success of the system.
Depending on how you define success, a team with the most hits is not the most successful. It’s the team with the most runs.
A guest poster at the INO Blog indicates that many traders focus on winning percentages when they investigate Automated Trading systems. The logic behind this seems solid: the more times you win, the more you win.
Trading, though, often has its own rules of logic.
How can you win 90 percent of the time and lose money?
It’s simple: One big loss can cancel out numerous small gains.
As Bill Poulus, guest poster at INO, points out:
Ask yourself this question: How is it possible that a forex trading method that wins 80 percent or more of the time can end up a net loser? The answer?
Losing trades. BIG losing trades.
The opposite is true, too. You could theoretically lose 90 percent of your trades, but if you score with a big homerun, it could cancel out those losses–and then some.
They real secret then is to not be persuaded by winning percentages at all. They can be skewed and cause you to skip a good system and use a bad system.
Your return rate is a more accurate bellwether.
The missing factor of most Automated Trading systems is risk control. Good trading systems avoid losses by controlling the position sizes and setting stop losses.
It’s the only way to win for losing.
Related posts:
- You Can’t Win for Losing: Why Money Management Matters
- Research Your Options For The Automated Trading Revolution
- Automated Trading’s Hidden Agenda
- Do Automated Trading Systems have to be Perfect?
- Why Automated Trading And Manual Trading Are Compatible
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is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
I think that once you have accepted the pain for yourself, you will need to decide if you’re going to tell your loved ones about the loss. In some cases this is a necessity, especially if the Forex loss was large enough that bills will not be able to get paid. There might be a lot of anger and even blame at first, but once things sink in, they will learn to accept it as well. And once they have accepted that a loss has occurred, they will try to find ways to help mend the household’s financial state.
Regards, Albert
This was good information. I’m currently dealing with the fear of learning forex, but fear can be relative. It’s almost more frieghtening to get caught long on US dollar, right? I’ll be back to read your blog again…
Thanks Scott.
Fear is relative. And can be a good thing if you learn from it. As people with long positions in the dollar are learning now! Please stop back and chime in any time you want.