Tip #7: How often you win is less important than you think
Traders often seek high win rates. However, the effort to ensure high hit rates is often misplaced because the win rate is only part of the equation.
The most critical equation a trader must know:
👉Expectancy = (Winning Probability x Average Winning Amount) – (Losing Probability x Average Losing Amount)
That formula encapsulates what trading is all about hence a trader's job is to ensure that expectancy is positive.
💡Positive expectancy is a core concept for traders, and no one should trade without a firm understanding of it.
If you understand expectancy, you will understand these quotes from Paul Tudor Jones and George Soros.
"5:1 (risk /reward). Five to one means I’m risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose''.- Paul Tudor Jones
"It’s not whether you’re right or wrong that’s important, it’s how much money you make when you’re right and how much you lose when you’re wrong''.- George Soros
👉What is crucial here is to appreciate that a profitable trading strategy can take on different profiles.
👉It might have a high or low win rate; it might involve large or small average wins/losses.
✒But it does not matter as long as your strategy produces positive expectancy.
👉What matters is to ensure that you are financially and emotionally prepared to handle the risk profile of your trading strategy.
For instance:
👉For strategies with low hit rates, can you accept multiple consecutive losses without falling into revenge trading mode?
👉For methods with high win rates but occasional huge losses, do you have the capital to sustain the less frequent but huge losses?
This post climaxes the 7 counterintuitive tips I have been sharing for days using quotes from the financial market's top traders.
My next post will be a conclusive post that highlights all the key takeaways from the 7 counter-intuitive tips to become a successful trader
