Do you need a 100% win rate trading system to be profitable?



Trade monitoring phone

In today’s trader development article, what we are going to discuss is exactly how many times you need to be correct in trading to be profitable?

As you begin your trading career, what you and many others may tend to over think and put too much emphasis on in the early stages is how many times you need to be right and you do this by either finding or building the best trading system to ensure its has a very high win percentage. In our opinion what a lot of traders get wrong is that focus too much on the win percentage, as they are obsessed with finding the ‘Holy grail’ system in which will allow them to be right 90% - 100% of the time. Now remember our job is to provide you a realistic approach to trading and be transparent with you and we can confidently tell you no such system exists and you will never find a system in where out X amount of trades taken, you will be correct every time.

Why do traders search for a system that will provide a 100% win rate, the answer is simple they have either been told one exists or they do not have the mental strength to tolerate losses and cannot bare to lose money in the market’s more likely than not because they are not trading a system that they trust and have discretion built into their trading.

Losses are simple part of the business within trading and nothing more than a cost of participation, you need to remember that the market moves simply based on opinion. Now of course nobody likes to lose money but let’s say hypothetically if you and every single participant in the market was correct in their analysis and opinion on market direction every time, would we see movement in price? The answer is no because we are trading currencies in where we are speculating which currency within a pair will appreciate or depreciate against the other. In Forex, there needs to be a seller for every buyer and vice versa, now for example purposes let’s say; you decided to go Long on EUR/USD and so did every other active participant in the market what would happen? The answer would be that EUR would massively appreciate against the USD because everyone is buying EUR, but what if your analysis or profit targets were fulfilled and you wanted to get out of the position, could you? The answer to this is no, because if every other participant in the market was only Long, well then there would be no one in the market waiting to take that sell position for you. Remember when we close a buy position, we must sell the currency and so if there is no one in the market waiting to take that sell position, well then you nor could anyone else close their buy positions in EUR/USD.

Therefore, there needs to be both sellers and buyers present at all times for equilibrium in the market and speculating on currencies is a game of probabilities and so every time you enter a trader you have a 50% chance of your analysis being correct, so of course you are going to be wrong sometimes but by being wrong you are helping the market move. Because when you are wrong and you close your position someone else is ready to enter the market in the opposite direction.

The quicker you can accept that in trading you will lose some trades, the quicker you learning curve will be and you will stop trying to find a 100% winning system, because if there was such a system everyone would use because as we said before nobody liesk losing money. Therefore, it did exist the market would not move because everyone would be correct every single time.

Now, just because there isn’t a 100% winning system does not mean to say you can’t make a 100% ROI (return on investment) which is what every trader should care about because it is how much money you are making.

There are some trade plans and systems out there that provide a win percentage of 50 – 70% and traders are able to make a 100% ROI of their account, how? The answer is through money management, as they will make more money when they are right as oppose to when they lose money and they are wrong.

You do not need a 100% winning system to be profitable, because if you only make 5% ROI on your account then you are a profitable trader. You see you shouldn’t focus on how times you can be right but how much money you can make when you are right in your analysis in comparison to your losses.

For example, if you use a system that provides a win percentage between 30 – 70% you can be a profitable trader through that of correct money management of your trades. Here at Fair Exchange, one system we use provides us with a 50% expectancy for being right within the financial year for all the trades we take, but despite that only being correct 50% of the time we can still make back the 50% of trades we lose that we also make between 50 – 65% ROI of the account value.

Why do so many trades always bounce from system to system when they begin their trading career? Simple, they are looking for a system in where they do not incur one single loss and

because they believe that they have found the ‘Holy grail’ system that provides a 100% win rate. However, the problem with new traders is that more likely than not they have not conducted the needed testing (back-testing + forward testing) to know the expectancy for what they are trading and if it does actually provide that 100% win rate. Therefore, when they do take a loss or a few losses they decide to abandon it because they realise that it does not provide a 100% win rate and they come to the conclusion it does not work. So, what happens they continue searching for such a holy grail and in the process taking more and more losses with their account equity slowly bleeding because they do not let a system become profitable before they deem it as ‘not good enough’. When in fact they could have all along had a system that provides a 70% ROI and combined with MM (money management) they could have potentially made a 100% ROI.

The reality is that many trade plans and systems work to a degree in where they provide a good win rate, but the problem is people as it is the trader that finds a problem because they do not yet realise that they can indeed be profitable with a 50% winning system for example and become obsessed with finding a system that offers that unicorn system of 100%.

Our advice is to not focus on how many times you can be right but from being right X amount of times with Y amount of losing trades how much ROI can you generate. Once you have the discretion of expectancy from your trade plan, then you will be able to take another step to becoming a profitable trader.


16 views0 comments