It usually pays off best for new traders to focus on making a few big winning trades and not worrying too much about lots of losers, provided the wins are big enough. This can be frustrating to deal with, though, as it requires a great deal of persistence to get through the long losing streaks, and to sit tight while watching small winners turn bad and become losing trades. Is there another way? Trading strategy A uses a profit target of 2: Trading strategy B uses a profit target of 1: If you think these two strategies would therefore be just as attractive to trade from the consideration of profitability alone, think again: Over a long time, probability suggests you would make twice as much profit trading strategy B with the higher win rate.
This is due to compounding. So why do most trading experts instinctively prefer a strategy with a lower win rate than a higher reward? Simply put, it is because strategies with high win rates are fragile and very questionable.
It is almost impossible, probably even completely impossible, to write any trading formula that will secure a win rate at a minimum reward of 1: Discretionary traders, though, often claim an ability to cherry-pick the very best trades and secure win rates at 1: That is a figure that is often quoted and, interestingly, it is a number cited by the legendary trader Jesse Livermore as the maximum reliability of any kind of technical analysis, over one hundred years ago.
A final word of warning: It is much, much safer to try to hit home runs and accept lots of small losses, provided you trade small. Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. Learn more from Adam in his free lessons at FX Academy. Registration is required to ensure the security of our users. Login via Facebook to share your comment with your friends, or register for DailyForex to post comments quickly and safely whenever you have something to say.
Log in Create a DailyForex. Want to get in-depth lessons and instructional videos from Forex trading experts? Register for free at FX Academy, the first online interactive trading academy that offers courses on Technical Analysis, Trading Basics, Risk Management and more prepared exclusively by professional Forex traders. Report Broker Scams Forex Widgets. Adam Lemon Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch.
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