Trading Losses
I have an email address for ads. Its inbox is inundated daily with promises on trading with zero losses and for making a 100% returns in a week or two. I don’t give them a second read.
The fact is trading losses are a part of winning – of being profitable. There is no Holy Grail that produces win rates of outlier portions. There are a couple of things worth remembering.
The first is the positive expectancy formula:
(Average Dollar Win x Win Rate) – (Average Dollar Loss x Loss Rate) = long-term profit or loss.
The second is our win rates are a function of the time frame we trade. The lower the timeframe, the greater the probability of a high rate. For example, I’ve seen trading records of scalpers with win rates of around 90%. The longer the trader’s timeframe, the lower the win rate. End-of-day traders results are around the 37% to 50% mark.
If that’s the case, why don’t we all scalp? Well, there’s the other dimension….the lower the trader’s timeframe, the lower the probability of the average dollar win. And, the lower the trader’s timeframe, the higher the probability of the average dollar win.
So,
- Lower trader’s timeframe = higher win rate x lower average dollar win.
- Longer trader’s timeframe = lower win rate x higher average dollar win.
The problem with most newbies is they fail to appreciate the ramifications of the two relationships. They chase the elusive indicator that promises mega returns with no losses (or few losses).
There ain’t no such animal.
The fact is on a trade-by-trade basis, the markets (& therefore our results) are random and unpredictable. Our edge appears only in the larger sample sizes. As a result, there is no way to avoid losses.
Can we experience periods when every trade we take is profitable? Yes, we can. But, don’t mistake luck for skill. Around the corner at those times when every trade we take is a loss. Focus on the longer-term; focus on reducing the losses and increasing the profits, and your success is assured.
Thanks to all those who sent in emails. I was down with a bad case of the flu. All well now.
Source: http://www.tradingsuccess.com/blog/trading-losses-6210.html
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