Did you know that a trade with a 90% winrate has the same likelihood of failing as a trade with a winrate of 20%? No, we are not crazy, but we are about to explain one of the most important trading concepts that the majority of traders get totally wrong and it’s also one of the reasons why the big losses happen when traders think that a trade is a good trade.
There Are No Such Thing As Good Trades
Once you understand this concept, you are one step closer to becoming a consistent profitable trader. Whenever you hear traders talk about setups and trades, they will use the words ‘good’, ‘mediocre’ or ‘bad’ to describe the quality of a trade. What will happen in a trader’s head when he assigns these attributes to a single trade is that he starts believing that a good trade should not fail that easily. This is a very dangerous standpoint to make trading decisions from.
Although different types of setups have different overall winrates, the quality of a single trade does not give any indication whether a trade will be a winner or a loser. If you are doing it correctly and religiously stick to your trading rules, all your trades should look identically and there is no way that you, or anyone else, could tell whether a trade is going to be a winner or a loser before price reaches either your take profit or your stop loss. Anyway, if you’d known that a trade would be a loser before, why in the world would your winrate anything but 100%?
Do You Understand Winrate Correctly?
You have to accept the fact that trading means failing. Only if you fully understand that all trades have the same chance of failing, you can become a profitable trader. It’s very important to note that the concept of failing doesn’t talk about the winrate of your overall trading performance.
A winrate tells you how many losing and winning trades you have over the long term and it enables traders to make decisions about risk and money management. The likelihood that a trade will fail is a concept that focuses on the outcome of a single trade. So although a winrate of, for example, 70% means that over the long term for every 100 trades you take, 70 will be winning trades, it has absolutely no value if you talk about the potential outcome of the current trade that you are about to take. You will never know which 30 trades are going to be your losing ones.
Your winrate tells you the long term ratio between winning and losing trades. Over the short term, a winrate has no value if you talk about the outcome of single trades.
The Difference Between New And Experienced Traders
A major difference between new and experienced traders is the way they handle being in a losing trade. Whereas new traders get their egos in the way of making educated trading decisions and believe that picking losing trades is their fault, the consistently profitable trader does not care about the outcome of a single trade. In the following part we explore how different traders deal differently with their expectations about trades and why the belief about the existence of ‘good’ trades costs new traders a lot of money.
New Trader: A losing trade means that it was my mistake
New and inexperienced traders think trading is an ego-thing. Everywhere on the web and on social media, traders seem to be chest-pounding alpha males that make a killing by being smarter than the markets. This gives the impression to new traders that if they have a losing trade, they are not good enough for this and that picking a losing trade is their own mistake.
New traders are prone to trade management approaches that include the widening of stop loss orders to delay the realization of a loss, adding to losing positions in order to achieve a lower overall entry price (averaging down) with the hope of getting out of the trade for break even faster and exiting trades when the price of a losing position comes back their entry price again. If you find yourself doing one of these things, you are trading based on emotions such as fear and greed and not on sound trade management approaches.
Half-Rookie: The best setups should not fail
A trader who has some experience trading the markets will know that trades can fail, but he hasn’t fully accepted the fact that even the ‘best’ setups will fail. At this stage, traders think that if they have patiently waited for a setup to unfold and when the setup matches all their entry criteria, it should not fail that easily. These types of traders are the ones that misinterpret the concept of winrate as described above and assign the attributes such as ‘good’ or ‘bad’ to trades.
When a trader gets married to a trade, meaning he feels emotionally attached because he thinks it’s a great trade that should make profits, he is less likely to cut a losing position.
Experienced Trader: A trade is a trade
Experienced and profitable traders have adopted the mindset that every trade can fail and that it is out of their control to know which trades will fail and which trades will make profits. They also know that the outcome of one single trade has no meaning in their trading career and therefore they will not let a normal trade turn into a big losing trade.
As long as a setup matches your trading rules and the long term winrate works together with the risk:reward of the trade, the experienced trader knows that the only possible outcome is to make money over the long term, even if their his trades will fail and fail again.
Conclusion: Once You Don’t Care About The Outcome Of A Trade, You Can Be Profitable
A trader should not lose his head over a losing trade and trying to force winning trades by trading based on emotions – it’s the fastest way towards your margin call.
The ability to take losses is a fundamental key attribute of a consistently profitable trader. And without the ability to not-care about the outcome of trades, a trader can never achieve long term success. If you want to become a profitable trader, you have to adopt the following concepts:
- Don’t confuse long term winrate with the likelihood of a trade failing
- The outcome of one trade doesn’t matter for your overall performance
- Don’t get married to trades, a divorce is expensive
- Even if a setup matches all your entry criteria, it will fail and that’s not your fault
- Cut losses early. Don’t try to force a winning trade
- Trading is playing the probabilities and knowing that over the long term, your edge makes you money
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