In the early stages of our personal trader development it can be quite difficult to move past our initial belief that the vast majority of our trades have to be successful in order for us to be consistently profitable.
George Soros; [quote]It’s not about being right or wrong, rather, it’s about how much money you make when you’re right and how much you don’t lose when you’re wrong.[/quote]
As an interesting experiment we’re quite sure that if we asked the vast majority of inexperienced traders how high the percentage of trades would have to be successful in order for them to be profitable, we’re pretty sure they’d come back with answers of 80-90%; they’d believe that eight to nine out of ten of their trades would need to be profitable in order for them to enjoy success at trading.
When we advise them that a fifty-fifty percent rate can still form the bedrock of a sustainable and credible trading strategy we are generally met by a mixture of disbelief and dismissive gestures. And yet no matter how many times it’s explained and no matter how many times we step out just how the 50:50 win rate can be successful, so many traders simply can’t move past the counter intuitive notion that only a high win rate is the only trading strategy that’ll work.
But as our title points out we don’t have to be right a lot of the time in order to be a successful trader, in fact we could in theory aim quite low, perhaps for a 50:50 win rate and still build a sustainable strategy and income from FX trading. Quite simply if our gains beat our losses we’ll win and building a trading strategy from a relatively low base of a 50:50 win rate has the added security of knowing (in theory) it can only get better.
Finding that edge and working it
The vast majority of us traders obsess over finding what we term a “Holy Grail” entry method, we often obsess over being right at point of entry only and compare how much other traders are making versus ourselves. This is opposed to discovering a method of trading; entry, trade management, money management and exit that gives us our edge that we can leverage into being consistently profitable. Then we simply develop the right attitude and approach to successfully trade it. We need to develop an edge and then simply repeat it time after time in order to take our profit out of the market.
Five simple rules to follow, whether or not we are right or wrong
1. The balance in my trading account is my primary tool to build wealth; my overall trading success depends on how wisely I use that tool.
2. A simple edge with tight money management can result in consistent profits.
3. I am not trading to be right I am trading to make money.
4. Losses day to day are irrelevant if kept within the drawdown set out in our trading plan, what really matters is our account balance at the end of the month or year.
5. All our trades are simply reasonable predictions based upon what has happened previously and nothing more. No one can accurately predict what the market will do all the time.
The mechanics of our trading edge
Extending the theme we developed early on in the article, regarding the confusion we highlighted on what represents a good win loss ratio, many new traders are often confused over what an edge actually is. Ask the majority of inexperienced traders what they think a trading edge is and they’ll probably cite the HPSU (high probability set up) entry as the edge.
An edge in trading is simply a greater chance of one outcome happening versus another. However, the overall definition of a trading edge should encompass more than simply an entry based on a high probability set up triggering. A real proven edge should contain all the elements of our overall strategy and not just the method constituent part.
Our trading edge therefore has several key ingredients to include the three Ms of: mindset, method and money management that we often refer to in these blog entry columns. Our edge also has entry, trade management and exit, therefore we arguably have six crucial aspects that quantify and qualify our overall strategy as an edge. Observing these six critical success factors and also working within the five steps we laid out, can help traders (of all abilities and experience) to become consistently profitable.
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