In today’s episode, you’ll discover why your winning rate is so low—and how to fix it.
So tune in right now…
The Complete Guide to Risk Reward Ratio
How to Use Trailing Stop Loss (5 Powerful Techniques That Work)
The Complete Guide to Stop Loss Order
How to Avoid Stop Hunting while Other Traders Get Stopped Out
Hey, hey, what’s up my friend? In today’s episode, I want to talk about why your winning rate is so low and what you can do about it.
1. You don’t understand the natural behaviour of the market
Here’s the deal, not all markets are created equal. For example, if you look through any long-term chart of the stock market, for example, the US stock market, you’ll see that it’s in a long-term uptrend.
Yes, we have pullbacks, retracement and recessions along the way. But in the grand scheme of things, in the long run, it’s in an uptrend.
If you don’t understand this natural phenomenon of the stock market and you’re looking to short whenever there’s a pullback or if the price is making a 20-day low, you’ll find that you will be losing consistently.
Because this natural phenomenon of the stock markets is an uptrend heading higher. If you understood the natural phenomenon of the markets that you’re trading, that should help to improve your winning rate.
For example, in a stock market, whenever there’s a pullback and you’re looking to buy instead of short, that will improve your win rate by quite a fair bit. For example, in the forex market, a pair like AUD/CAD tends to reverse at the previous day highs and lows.
This is kind of like the phenomenon of AUD/CAD. If you are unaware of this and you’re always looking to buy breakouts of the previous day highs and selling breakdowns of the previous day lows for AUD/CAD, then your win rate is going to be poor, because you don’t understand this natural phenomenon of the market.
It’s important to understand the behaviour of the markets that you’re trading, is it more towards a momentum and trending market? Or is it more of a market that reverses every time at the previous day’s high or the previous week’s highs? That’s the first thing.
2. You adopt a trailing stop loss
There’s nothing wrong with using a trailing stop loss. But if you use a trailing stop loss, you have to be prepared to incur a lower winning rate. Why is that? If you think about this, the purpose of a trailing stop loss is to give the trade some buffer so that you can hopefully catch a trend.
But for most markets, it doesn’t trend right on the moment you put on a trailing stop loss. It trends when it wants to trend, it ranges when it wants to range. You should expect that you don’t catch a trend on every single trade.
Also, for trailing stop loss, you only exit a trade after the market has moved against you by a certain margin. Meaning you will never exit at the absolute highs because you are trailing your stop loss below the highs.
Only if it drops below the highs by a certain margin like 10%, then you will exit your trade. In other words, you’re always exiting the trade when the market has moved against you.
By using a trailing stop loss technique, there’s always a good chance that you’ll see some open profits, only to see that the market reverses and hits your trailing stop loss. So you end up watching a winner become a loser.
Using a trailing stop loss, or rather, trying to be a trend follower, you will no doubt have a lower winning rate as well.
3. Your stop loss is small relative to your target
Here’s the deal, if you have like 5 pips stop loss, and let’s say 100 pips profit target, then that’s a very favourable risk-reward. You’re risking $1 to make $20.
But here’s the deal, the downside to this is that you should expect to be wrong often. You will often see your 5 pips stop loss get hit. Maybe sometimes if you’re lucky, the market will eventually hit your target and reach 100 pips.
If you have a tight stop loss relative to your target, you should also expect a very poor winning rate on your system.
What you can do to fix your poor winning rate
Here are a few solutions for you:
#1. Understand the natural behaviour of the markets
As mentioned earlier, if you understand the natural behaviour of the market, like knowing stuff like every time GBP/JPY breaks out of the previous day high, it tends to follow through.
Then if you try to trade in the direction of the breakout, you can see that you will improve your winning rate compared to if you were to trade against the breakout. That’s one example.
#2: Have a reasonable target profit
As mentioned, don’t have 10 pips stop loss but 200 pips target, because more often than not, your target is not going to be met. Yes, the potential risk-reward on the trade is phenomenal. But what are the odds of the market reaching your target? That’s the more important question.
Have a reasonable target, maybe having 50 pips stop loss while your target is at the nearest swing high or resistance that’s possibly 75 pips away, risking $1 to make $1.50. It’s fair, it’s a reasonable target and that will improve your winning rate along the way.
#3: Low winning rate doesn’t mean that you should abandon your system
This is about the trailing stop loss I’ve mentioned above. Yes, you might have a low winning rate, but it doesn’t mean that your trading system is a losing system.
Because for example, trend followers have a winning rate in the range of 30% to 40%, maybe slightly higher ones would be 45%. But the reason why trend followers are profitable is that their winners are much larger than their losers
Let’s say out of 10 trades, there are 7 losers. If you lose $1 each, you are down $7. But for the remaining 3 trades, every time you win, you make $5. We can see that the 3 trades multiplied by 5 will be a gain of $15.
Minus the $7 that you incur from your losses earlier, you’re still up a net gain of $8. So the key thing is not to focus on winning rate and it’s not to have a very high winning rate, but rather to strike a balance between your winning rate and your average gains to losses.
That is really what matters as a trader. I know this episode is talking about helping you improve your winning rate. But the bigger picture here is about your expectancy as a trader, not just your winning rate. And that’s your winning rate combined with your average gains to losses or rather, your average risk-reward on the trade. I hope that makes sense.
With that said, let’s do a quick recap.
- Understand the natural behaviour of the markets to help you improve your winning rate
- If you’re a trend follower trailing your stop loss on your trade, you should expect your winning rate to be lower
- Very small stop loss with wide profit target will also incur a low winning rate
- A few solutions: you must understand the natural behaviour of the markets and have a reasonable target profit
- Most importantly, don’t just focus on winning rate – focus on your expectancy instead, which is your winning rate combined with your average risk-reward
With that said, I wish you good luck, good trading. I’ll talk to you soon.
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