Here are two different ways to make money in the markets and have a profitable system.
#1 Have a High Winning Percentage
If the size of your wins and losses are EQUAL and you have more wins than losses then you will make money if you simply have a higher winning percentage of trades than losses.
Profit $100
Profit $100
Profit $100
Profit $100
Profit $100
Profit $100
Lose $100
Lose $100
Lose $100
Lose $100
This is a 60% win rate and a $200 profit, it is a winning system. This system would be improved by having smaller losses or more wins. It becomes a losing system very quickly with just one two more losses that takes it under a 50% win rate. One more loss that takes it to a 50% win rate makes it a losing system because after slippage and commission costs you will lose money. Not very robust any little change in the markets makes it unprofitable.
Profit $100
Profit $100
Profit $100
Profit $100
Profit $100
Profit $100
Profit $100
Profit $100
Lose $100
Lose $100
This is an 80% win rate system, $600 in profits, this is the most psychologically comfortable way to trade. The key to keeping this system a winning system is to cut losses short, one big loss of $700 or two losses of $400 each makes this suddenly unprofitable. Most traders have trouble trading this type of system in the real world because they do not honor their original stops.
Profit $100
Profit $100
Profit $2,000
Loss $50
Loss $50
Loss $50
Loss $75
Loss $75
Loss $100
Loss $100
This is an example of a low winning percent but robust system. 30% wins is still enough for $1,700 in profits. One out lying move is enough to make the ten trades profitable. This is similiar to how many trend following systems work. Trend followers attempt to identify signals from price levels that historically have lead to trends. If they are wrong they lose a little if they are right they make a lot. They can be wrong many times and still be profitable when one big trend is captured using a trailing stop. The key is they are wrong small and right big.
Contrary to the old Wall Street saying you can go broke taking a profit if your losing trades are bigger than your profitable trades.
The one thing that will make make all the difference in your trading is the SIZE of your wins and losses NOT your winning percentage.
It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – See more at: http://www.bigfatpurse.com/2008/04/george-soros-its-not-whether-youre-right-or-wrong/#sthash.oN5dTC5z.dpuf
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” -George Soros
It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – See more at: http://www.bigfatpurse.com/2008/04/george-soros-its-not-whether-youre-right-or-wrong/#sthash.oN5dTC5z.dpuf
It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – See more at: http://www.bigfatpurse.com/2008/04/george-soros-its-not-whether-youre-right-or-wrong/#sthash.oN5dTC5z.dpuf