BarroMetrics View: The 100% Win Rate Myth
The conversation Paul and I had in my blog, “Value for Money“, prompted this post.
My view of Paul is someone who is highly intelligent, and someone who has a great thirst of knowledge. My impression is he has covered most of the trading courses in Singapore. So, when he makes a comment, I am always happy to listen.
In this case, though, I was surprised at his take.
What prompted the conversation was Paul’s comment ” Those who passed the exam and keeping the Trading Commandments are supposed to trade in such a way in future that all trades made are profitable without losses!”.
Later in the conversation, Paul revealed that the Dr C was teaching a scalping timeframe.
Here’s what still surprises me – that retail traders believe that there is a methodology being taught that will provide a 100% win rate. It shouldn’t surprise me, I suppose, but it does. I can only say the salesperson must be awfully good.
Let’s be clear. A scalping timeframe needs a win rate to compensate for the fact that the $win:$loss is usually less than 1:1. And in the hands of a good trader, a win rate in the high 80%s and mid 90% is possible – at least this has been my experience, gathered from the successful scalpers with whom I have had the pleasure of meeting, and in some cases, calling friends.
I don’t know the methodology that Dr C taught (I did try to Google but was unable to find any info). Presumably if a scalping timeframe, he was relying on a reversion to mean to prevent ‘losing trades’. In a scalping timeframe, most trades, if appropriately entered, can be expected to revert to mean and to allow us to square a trade without loss.
But the ‘key’ words are: “most trades”.
Tom Baldwin was one of the largest (if not the largest Bond trader in the Chicago Pits). I recall one lunch time – he was either holding court or giving a noon-day lecture (many, many moons ago so my memory is suspect). He was telling us newbies how he had tossed away many days of profits in one trend day down. On that trend day down, he took his loss at the end of the day.
That comment lays bare the dangers of scalping. There are times when you will be caught on the wrong side. And, at those times, you will have to exit a position no matter how large the loss. Coming into trading, and looking for a high win rate (or no loss rate) is setting yourself up for long-term failure.
Much more important than the win rate alone is the expectancy return.
(Avg$Win x WinRate) – (Avg$Loss x LossRate)
The product of this formula must be positive is we are to make money. Where our Avg$loss is so large as to overwhelm the high winrate, then you will see a negative expectancy.
In my view, if your money management and trading plan, have an edge, then the trader’s focus ought to be on the execution process. Get that process consistently right, and you won’t have to worry about the win rate.