Understand what really matters in trading.
Many traders mistakenly assume that a high win rate (percentage of winning trades) guarantees success. Here are three common mistakes:
Focusing on win rate: A trader with an 80% win rate may have losses greater than gains if they do not control the risk-to-reward ratio (R:R). For example, if you win 8 trades at 100 PLN each but lose 2 at 500 PLN each, you end up in the negative.
Ignoring transaction costs: Slippage and spread can quickly eat into profits. Imagine you buy shares for 1000 PLN, the spread is 1%, so you need to earn at least 10 PLN to break even, not counting slippage.
Mismatched stop losses: Poorly set stop losses can lead to larger losses. An ineffectively set stop may not be filled, resulting in a loss greater than planned.
Focusing on win rate can lead to an illusory sense of security that does not reflect the actual threat.
When you concentrate solely on the number of trades that ended profitably, you ignore the risks associated with each trade. Often, traders in pursuit of a high win rate overlook the risk-to-reward ratio (R:R) and the expectancy factor (expected value of profit per trade). This results in taking on too much risk relative to potential gains.
Let's assume you have a capital of 10,000 PLN and maintain a win rate of 70%, but the average R:R ratio is 1:0.5.
Each win brings you 50 PLN (5% of 1,000 PLN), while each loss costs you 100 PLN (10% of 1,000 PLN). After 10 trades, you have 7 wins (7 x 50 PLN = 350 PLN) and 3 losses (3 x 100 PLN = 300 PLN). Your final balance shows a profit of only 50 PLN, which, when accounting for transaction costs such as spreads, may even result in a loss.
Ignoring the appropriate R:R and expectancy leads to a situation where, despite profits on most trades, you end up with no profits or even losses.
To improve your strategy:
Focus on R:R: Set the risk-to-reward ratio at a minimum of 1:2. This means that for every unit of risk, you expect two units of profit.
Analyze expectancy: Regularly calculate the expected value of profit per trade. Include both win rate and R:R in this.
Control costs: Carefully track transaction costs, such as spread and slippage.
Adjust stop losses: Set stop losses to be realistic and account for market volatility.
Regular analysis: After each series of trades, conduct an analysis to better understand where you can increase profits and reduce risk.
Analyze the R:R ratio and expectancy of your trades daily.
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