More means better in most things in life:
The more answers correct, the better the grade.
The more reps, the better the technique.
But when it comes to trading…Having more wins doesn’t equal more money.
Yes, you need to win trades to be a winner, but high-win rate strategies aren’t the key to trading fortunes. It’s even fair to say they are overrated. Two reasons why:
- A good high-win rate strategy is hard to find.
- Many low-win rate strategies outperform high-win rate strategies.
Here’s a trading experiment done in 1983 that most don’t know about
A legendary commodities trader Richard Dennis set out to prove that anyone could be taught to trade successfully. He and his partner, William Eckhardt, trained a group of novices, known as the “Turtles” in a trend-following strategy.
The key elements were simple: cut losses quickly and let profits run.
This strategy often resulted in a low win rate, but the winning trades were much larger than the losing ones.
Despite frequently losing more trades than they won, the Turtles made significant profits. One notable Turtle, Curtis Faith, earned $31.5 million in just four years.
Source: https://www.turtletrader.com/trader-dennis/
The experiment demonstrated that disciplined execution of a low-win rate strategy could yield crazy returns, debunking the myth that high win rates are essential for trading success.
Now that you know this, there’s another thing I need to tell you:
Successful High-win rate strategies come with a catch
Many of them require a negative risk-reward ratio to succeed.
What’s a negative risk-reward? It basically means risking £100 to make £50 — this would make you profitable in the long term if you have a 67% win-rate strategy or higher.
Here’s why it’s a secret problem:
Your brain doesn’t like it.
There’s a book out there called “Bulletproof Trader” by Steve Ward. The book exposed the minimum risk-reward ratio for traders to be satisfied based on research.
The ratio was found to be 2:1. Risking £1 to make £2.
Fun Yet Annoying Fact: The ratio is 2:1 because human beings have an inherent negativity bias. We give negativity more weight than positivity because it was essential to our survival in the old world. However, this bias can be a hindrance in activities like trading.
Therefore…pursuing a high-win rate strategy is unnatural, especially when you experience losing streaks. It will feel like you’re going one step forward and two steps back (despite data saying you’re on the right track).
You can still make high-win rates work. Just being aware of this information is enough to change your trading paradigm. You now have less of a reason to overtrade when you win.
In closing…
Have an open mind when creating a strategy
Don’t discount a strategy just because you found out it has a low win rate. See if you can make the low-win rate work.
Also, don’t assume your high-win rate method is failing because the gains aren’t satisfying. Trust your data!
Soon you’ll be able to verify your trading scenarios with TradrLab. It will quickly help you decide if the high-win rate strategies or the low ones are worth it.
We have more information coming soon regarding TradrLab.
Stay tuned and happy trading!