Those were my first thoughts when I stumbled upon a crypto trading strategy that promised an 87% success rate.
However, since I wasn’t entirely new to the crypto space, my first excitement quickly faded, and a feeling of doubt proliferated.
I had seen too many false promises and scams. However, this time, it was just a YouTube video in which a guy explained the strategy.
So, I watched the video, and my excitement grew again. This guy explained a strategy and provided a detailed backtest. And what can I say? He was right: 87% success rate.
Wow, the Lambo was again on the agenda. What should go wrong with such a trading strategy?
As you can probably imagine, it went wrong.
Today's post explains exactly why.
I will demystify trading strategies and provide you with everything you need to know to make better trading decisions.
The Misconception of (Crypto) Trading Success Rates
Let’s get things straight right at the beginning.
When discussing a trading strategy with an “80% success rate,” we refer to historical data. This figure suggests that 80% of the trades made using this strategy were profitable in the past.
However, the critical point to understand is that trading inherently involves uncertainty and the unpredictable nature of markets. Just because a strategy worked 80% of the time in the past does not guarantee future outcomes.
Moreover, one crucial aspect to understand is that a crypto strategy’s success rate does not provide a statistical probability for the next trade. This means that just because a strategy had an 80% success rate in the past, the chances of winning the next trade are 80%. Very important to understand!!
The Reality of Statistical Variability
Even with a strategy that historically wins 80% of the time, there’s a significant misunderstanding about what this means for future trades.
It’s entirely possible—and statistically probable at some point—that you could encounter a streak of losses.
For instance, within your following 20 trades, you might hit a rough patch where most trades are losers despite the strategy’s past success rate.
This doesn’t mean the strategy is flawed; it’s a natural part of statistical variability. Every trade has its own set of circumstances, and the market conditions can change rapidly, affecting the outcome of your trades.
Risk Management: The Key to Navigating Trading Success Rates
I hope I haven’t destroyed all your dreams by now. If so, I hope the following parts of the post will provide some cure.
Having a crypto trading strategy with a high success rate is definitely an important pillar. However, you need to enrich it to really become successful.
This is where risk management comes into play.
A high success rate does not eliminate the need for effective risk management. On the contrary, it underscores its importance.
Risk management strategies, such as setting stop-loss orders, managing position sizes, and diversifying your portfolio, are crucial to protecting your capital, especially during those inevitable periods when the trades don’t go your way.
Risk/Reward Ratio — A Crucial Factor For Successful Crypto Trading Strategies
Another concept to consider is the expectancy of a trading strategy, which considers both the success rate and the risk-to-reward ratio.
A strategy might have a lower success rate but could be highly profitable if the gains from the winning trades significantly outweigh those from the losing ones.
Conversely, a strategy with a high success rate but poor risk management can still lead to overall losses.