October 21, 2009
Losing Trades - Why You Must Learn To Accept Them
I was reading another forex trading blog recently and the author of the blog made a prediction which subsequently turned out to be wrong. He then got some stick from a reader for making a bad call, which I thought was bang out of order.
The fact is that no-one can make winning calls 100% of the time, no matter how good a trader they are. Indeed if you read through some of my old posts, you will see that I've made a few duff predictions in my time.
Losing trades are part of the game and if you have aspirations to become a profitable trader, you are going to have to accept that fact. The key to success is to manage your losses by cutting them early and keeping them small, whilst either letting your winning trades run for as long as possible, or making sure they at least exceed your losing trades.
Let me give you a few scenarios to demonstrate this point:
Trader A is a short-term trader who looks for 20 pips per trade and uses a stop loss of 120 pips to give himself every chance of hitting these targets. His winning success ratio is an impressive 90% and he averages 10 trades per week.
Trader B is also a short-term trader but he is much more cautious. He looks for profits of 25 pips and uses a stop loss of 10 pips. His success ratio is just 50% and he also averages 10 trades per week.
Trader C is more of a position trader. He looks for profits of 150 pips per trade and uses a stop loss of 25 pips. His success ratio is just 20%, ie 80% of his trades are losing trades, and he too averages 10 trades per week.
Which trader is the most profitable?
Well let's work it out:
Trader A, who has the highest amount of winning trades (and probably the biggest ego), averages 60 pips per week.
Trader B, who is only right 50% of the time, averages 75 pips per week.
Trader C, who is only able to identify winning trades 20% of the time, averages 100 pips per week.
Of course these are all hypothetical figures, but the point I want to make is that you don't need to spend your time looking for trading methods that have very high success ratios. Losing trades are not necessarily a bad thing. As long as your winning trades more than compensate for your losing ones, you are always going to come out ahead, even with a relatively low success ratio.