“It’s not whether
you are right or wrong, but how much you make when you are right and how much
you lose when you are wrong”. This quote from George Soros 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 high percentages of success and regard the win rate as the most important
metric. Well, the win rate it totally irrelevant. You can be profitable with a
30% win rate and unprofitable with an 80% one.
How? Well, if you have
8 small winners and 2 big losers, you might end up at breakeven or even down.
Risk management is key here. Most successful traders are right on half or even less of their trades. For example, George Soros had a 30% win rate while the
Medallion Fund, the best money making machine in history, reportedly has 50.75%.
The goal of a successful
trader is to take good asymmetric bets and cut off those that are not working
out as expected. That’s it. It’s about trading well.
This wrong focus
on the win rate leads new traders to being scammed with trading strategies that
promise very high win rates. They jump from one strategy to another as soon as
those promises don’t meet their expectations. This is a losing and dangerous
cycle that ends up 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 won’t have faith in your skills 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 the money.
Once you achieve a
level where you see that you have positive returns over at least 6-12 months
horizon, you will start to gain some confidence in your abilities which will
help you immensely because you will know that even if you have short term
setbacks, your long-term success won’t be affected
