Would you like to see your profitability increase? Well, here’s one tip you can use straight away:
“Check to see if your trade management can be improved.”
The 90% who fail to make the grade share many dispositions. One is the need for a high win rate – you know somewhere above 80% or 90%. Never mind that the world’s best hedge fund traders average just under 50%.
Just recently, a fellow trader-coach told me that one of his newbie coachees rejected a system because it had a 47% win rate (??!!). The newbie focused on the win rate and ignored the more important stats:
- The Expectancy Return, and the important (very important),
- Average Dollar Win and Average Dollar Loss
Expectancy Return =
(Win Rate x Average Dollar Win) – (Loss Rate x Average Dollar Loss)
The newbie had this decision to make (and it’s one we all face):
Did she want to make money or did she want to be right?
The answer is a critical one. Let me illustrate by comparing a couple of examples:
- Avg$Win = $30, Win Rate = 33%
- Avg$Loss = $10, Loss Rate = 67%
- Expectancy Return = $3.20 per trade.
- Avg$Win = $1.00, Win Rate = 95%
- Avg$Loss = $50.00, Loss Rate = 10%
- Expectancy Return = ($1.55) per trade.
Over time: the trader will make money; the second MUST lose money. It’s as simple as that.
So, have a look at your trading records (if you don’t keep an equity trading journal, start in 2018!), and calculate your Expectancy Return.
Tomorrow, I’ll look at one tip on how to improve it.