The first thing beginner traders search for in a strategy is a high win rate. That is a big mistake…
“It’s not whether you are right or wrong, but how much you make when you are right and how much you lose when you are wrong”. This quote from George Soros sums up perfectly what trading is all about.
Beginner traders don’t want to experience the pain of loss, so they search for trading systems that have high percentages of success and regard the win rate as the most important metric. Well, the win rate it totally irrelevant. You can be profitable with a 30% win rate and unprofitable with an 80% one.
How? Well, if you have 8 small winners and 2 big losers, you might end up at breakeven or even down. Risk management is key here. Most successful traders are right on half or even less of their trades. For example, George Soros had a 30% win rate while the Medallion Fund, the best money making machine in history, reportedly has 50.75%.
The goal of a successful trader is to take good asymmetric bets and cut off those that are not working out as expected. That’s it. It’s about trading well.
This wrong focus on the win rate leads new traders to being scammed with trading strategies that promise very high win rates. They jump from one strategy to another as soon as those promises don’t meet their expectations. This is a losing and dangerous cycle that ends up in a big waste of money and eventually a drop out of trading.
Losses are a natural part of trading, and you just have to know how to deal with them. Unfortunately, in the beginning, you won’t have faith in your skills to generate consistent positive returns, just because you’ve never done that. You should just learn how to trade and focus on trading well rather than trading for the money.
Once you achieve a level where you see that you have positive returns over at least 6-12 months horizon, you will start to gain some confidence in your abilities which will help you immensely because you will know that even if you have short term setbacks, your long-term success won’t be affected.
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