Why Traders Should Aim To Lose 40% Of The Time

It is a well known fact that smart and successful people lose money in the markets. The reason is because they aim to win all the time. After all these years I have still not come across a system that enables a person to win 100% of the time. Haven't even come across a system that wins 95% of the time.

I have heard of a friend whose system wins 93% of the time (extremely choosy and rarely make trades, maybe like 1-2 a month). But the majority of great traders I come across have a win rate of about 60%-70%. If they were to attend a public school, teachers will call them a failure because they only score 60 marks which translates to a rubbish B in the report card.

I have actually read somewhere that the Casinos in Las Vegas have a win rate of only 55%.

Which means they lose 45% of the time. Which in turn means every month they are coughing up millions and millions of dollars in losses giving it to gamblers who frequent the casinos. They only have a 5% edge over the public (insane). I guess they need to let the public win lots of money if not who will come and play again?

But it is the 5% edge that made them into multi billion dollar companies that generate profits like crazy because no matter how much they lose, at the end of the day they are still up.

You Only Need A Small Edge

The thing with the markets is, you need an edge to be able to make money consistently. An edge is a trading strategy or setup that over time will put money in your account.

I get lots of questions from new traders and people everyday and one of the things that I realize separate the amateurs who lose money consistently and pros is the lack of a trading strategy that they stick to. You can gauge whether the person has a trading strategy or not just by the way they ask questions and answer your questions.

An amateur will be chasing every single stock that is going up fast or going very low (trying to bottom fish and be like Barren Wuffett). A seasoned trader is someone who only plays his or her trading strategy/strategies.

So, if you have a trading strategy that gives you a win rate of only 60% for the rest of your life, you will be profitable in the long run. Can't imagine how its going to be done if a trader switches between different trading strategies every 2 days.

A short example would be this.

You make 10 trades a month. You win 6 trades and lose 4 trades. Every trade you win, you make $10k. Every trade you lose you lose $10k. So for that month you make $60k and you lose $40k. But at the end of the month you are still up $20k.

Reward Risk Plays A Part

Win rate or percentage is just one part. Another important part is reward to risk. This seldom gets mentioned by new traders. But older traders have deep respect for reward to risk.

Its important to find a trading strategy that gives you limited risk and unlimited reward. Trend trading is one of them. How much reward you should aim for is up to you but I think something that is above 1.5 would be ideal.

Meaning for every $10k you lose, you should be able to make $15k.

Try to aim for a 2:1 or even a 3:1. If you can't maybe a 1.5:1 is enough.

So, lets take the above scenario again with a win rate of 60% and combine it with a R/R of 2:1.

You take 10 trades a month. You win 6 trades and you lose 4 trades. Your R/R is 2:1, So, you make 6x20k =120k that month and lose 4x10k = 40k a month.

Which at the end of the month, your winnings are 120k - 40k = 80k.

Less Stress 

I think that if you aim to win only 60% of the time it will put a lot of pressure away. I always believe that the stock market is the hardest place to make easy money. No need to add the extra pressure by aiming for 90% win rate every month.

In It For The Long Run

A statistical edge will only come into play if it is allowed to run its course over a long period of time. This is where actuarial science comes into play and have been able to generate tons of profit for insurance companies.

If you take only 10 individuals, the odds of you making money is very low. But if you take 100,000 individuals, the premium that you receive from 100,000 policy holders will be able to cover those who claim the insurance and also generate profits for the company.

Its the same with trading.

You just can't gauge your trading career or profits based on 10 trades. Take at least 50 trades using the same "boring" strategy and your edge will play out.

Conclusion

Nothing so secret about how old traders trade. But to be able to gain an edge in the markets takes some discipline on the part of the trader to take the same trading strategy again and again and let the edge play out over the long run.

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