Not One to Bag On Your Great Winning Streak, But …

Posted on Oct 7 2015 - 4:21pm by Sharpe Trade

Some of what I will say here, I discussed earlier in a closed group of professional and aspiring traders.  So if you will permit me, I am going to repeat myself from that earlier conversation.

Sort of.

It seems many new retail traders are absolutely bent on discovering the most “accurate way” to trade.  How to discover and stumble across some secret method of determining market direction that is ‘highly accurate’.  Accuracy rates higher than 90%!  I watched one young trader proclaim he thought he had discovered a ‘secret method of trading’.

What was this method you ask?

He works at tracking other traders who are 90% accurate in their ‘calls of market direction’, and then does what they do.

Beautiful methodology there buddy.

Hope none of them get hit by a bus.

I don’t want to rain on anyone’s parade, and I’m not one to bag on your great win streak?  But neither I nor any other professional trader in the industry gives five flying figs about your highly accurate ‘system’.  

You can be 90% accurate, and still lose a lot of money.  The worst loss of my entire trading career came on the heels of one of my greatest winning streaks.

As we have demonstrated within our free “Money Management For Investing and Trading” series, accuracy of your calls on market direction, for a directional trader, is only about 1/6 of the total equation.

Now, in ‘The Sharpe Report‘, we do not deal with Forex trading per se.  But let me show you my personal Forex trading performance metrics, as it relates to the topic at hand.

Before I do so, I’ll let you know right now that for the last 26 trades, I am only 55% accurate.

That means that 45% of the time, my call for market direction is wrong.

The capital graph looks a little something like this …

25 Trades Forex Risk Reward Ratio 55 Accurate

You see, when I lose on a trade, I lose small.  When I win, I try to win more than what I have put at risk.  That doesn’t always work out.  But on average, for every dollar I risk, my reward averages around 2.38.

And that is why the capital graph is neatly positive.  

And I’m not even bagging on accuracy rates. Some years back, I was running around 80% accurate for the year.  I also carried a risk reward ratio of 1 risk to 1.8 reward, and maximum consecutive losses was something like … 2.  

It was like the clouds had parted and I was hearing the angels sing in chorus.

It was nice.

While it lasted.

But far too often, it seems new retail traders believe that profitable trading, is about being correct in regards to market direction.  Or getting ‘on’ such a streak.  

It’s not.

During the midst of the earlier conversation, one professional money manager stated …

If you can make money losing half your trades, I know what you look like when you are on a golden run

Experience teaches traders that accurate periods will come and go in ‘waves’. If you are above 80%, and have a 1 risk to 2 reward r/r, and minimal intra-trade draw-down? Any experienced trader knows  they should enjoy that time as much as possible because it will not last long.  

Eventually … the accuracy rate will go down. And more than likely, the risk reward will go up.  That relationship is akin to a physical law that has been written into the fabric of the universe.

Regardless, the profitability remains, due to the higher risk reward ratio.

Profitability just takes a different form

I’ll leave you with this.

The same professional trader stated near the end of the conversation:

“Anything over 90% I don’t even look.

I call them “Only lose once” strategies”

When it comes to trading, all you really have to do is learn how to say three little words …

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