It’s natural to want to have a high percentage of winning trades, it makes us feel good when a trade turns out to be a winner because we make money and we were right about the direction of the market. However, as we will discuss in today’s lesson, being right about the outcome of any given trade and having a high percentage of winning trades are two things that are not necessary to be a profitable trader.
Being right and wrong are two things that we are all very familiar with. In life, people seem to have an inherent need to be right about almost everything. Even when we are wrong about something and we know it, we still tend to rationalize our actions to ourselves to gloss over the fact that we were not right. Indeed, we often tend to get upset when someone tells us we are wrong about something; people don’t like to be wrong because they internalize that information to mean they are inferior in some way. This is an important point to consider as a trader, because as traders one of the things we have to learn to deal with on a regular basis is losing, A.K.A. being wrong about the direction of the market.
Proof that being right about a trade is irrelevant
Being ‘right’ about the direction of the market on any given trade is not really relevant to your overall success or failure as a trader. As I will show you below, you can be wrong more often than you’re right about the direction of the market and still be a profitable trader. Therefore, it’s paramount to our forex trading mindset and to our overall trading performance that we learn to detach ourselves from the feeling of needing to be right about every trade.
For proof that you should not worry about being right or wrong on any given trade, let’s discuss the topic of risk reward…
When you start thinking in terms of risk reward and truly understand the power of risk reward, you will begin to understand that things like winning percentage and being ‘right’ about any singular trade are simply irrelevant to whether or not you become a consistently profitable trader.
If you examine the chart of hypothetical trade results below, you can easily see the power of risk reward. That power can be seen in the fact that if you keep your risk (R) constant, and you obtain a reward of 2R or more on all your winning trades, you can lose substantially more than you win and still come out comfortably ahead. That is to say, you can be “wrong” about market direction more than you are “right” about it and still make money in the markets.
A 20 trade hypothetical sample of randomly distributed winning and losing trades:
For most traders, this idea of being wrong and still making money is not something they think about very much. Most traders think they are going to be right on every trade they take right after they enter it. It’s natural to think that your analysis was right and that this trade is “going to be a winner” just as you enter it. So, we basically set ourselves up to expect to win and to be right every time we enter the market. However, this obviously clashes with the FACT that we are not going to win on every trade…thus we have the recipe for an emotional reaction to a losing trade. In essence, when our expectations don’t mesh with the reality of a situation, we tend to become emotional, and this is especially true in trading.
So, to remedy this situation, we simply have to accept the FACT that we aren’t going to be right about every trade we take…AND that ‘being right’ is not necessary to make consistent money in the markets. Don’t take it personally if you lose on a trade and remember that it’s just another execution of your edge. Over a series of say 20 trades like we saw above, you are GOING TO have losers, you shouldn’t become emotional about any losing trade if you’re following a plan and maintaining your pre-determined risk tolerance. Look at that chart above, it shows only a 40% win rate but over 20 trades the account was still up 17.5%. Even if that hypothetical trade set took place over 3 or 4 months, a 17.5% gain on your trading account is still very good.
It will help if you study the chart above and imagine you have a bigger account than what you have. If you won only 40% of the time like in the example above, but you hit 2R and 3R winners whilst keeping your losers all at 1R, you would make a lot of money after those 20 trades on say a 50k or 100k account. That $350 hypothetical profit would be $8,750 on a 50k account…that’s not a small chunk of change by anyone’s standards. So, always remember that if you can consistently make money on a small account, even if you aren’t “right” all the time, you can also make money on a bigger account; an amount of money that would be life-changing.
So, don’t be discouraged if you have a small trading account, don’t try to over-trade it or over-leverage it because you think you can “make money faster that way”. Instead, understand that if you maintain a consistent risk amount that you’re comfortable with, and only trade high-probability price action strategies, over a series of trades you should come out profitable, even if you lose the majority of the time.
Check your ego at the trading room door
Losing a trade or being wrong about the market direction doesn’t mean you’re inferior in any way. It just means that the market didn’t move in your favor this time…there’s no reason to take it personally. Losing is part of being a trader and it’s something you can’t avoid. The more you try to avoid losing trades the more money you will lose because you will begin assigning too much importance to any one trade.
Many traders become fixated on trying to avoid all losing trades. They take losses way too personally. They forget that losing is part of the business of trading and they let every losing trade affect them on a personal level.
As traders, it’s important to understand that even if we see what we think is a ‘perfect’ trade setup and it turns into a loser, we didn’t do anything wrong…we just had a losing trade. It doesn’t mean we suck at trading or we that we aren’t smart enough to “figure it out”, it just means that that particular instance of your trading edge was a loser. In a different article I talk about how there’s a random distribution of winners and losers for any particular trading strategy, and if you understand and accept that fact, it will significantly help you trade with less emotion.
If you’ve participated in any public forums about trading you probably have figured out that most traders tend to discuss their winning trades far more than their losing trades. You may have even caught yourself doing this. It’s natural to want to gloat about our winning trades to our friends and on online forums, even if overall we have lost money in the markets…because it makes us feel good when we are right about a trade.
What you have to do is understand that whether or not you win on any one trade really doesn’t matter in the grand scheme of things. As we showed in the risk reward diagram above, being “right” about the direction of the market is not relevant to your success or failure in the market. You can be “wrong” more than you’re “right” in the market and still make money if you make proper use of risk reward and you are trading a high-probability trading strategy like price action in a disciplined manner.
The point is this; don’t let your ego get the best of you in the market. If that trade that you waited patiently for and that looked “perfect” ends up not working out, don’t immediately jump back into the market just because you feel angry or you feel “cheated” by the market. Instead, think of it as just another instance of your trading edge, and this trade just happened to be one of the losers that you will inevitably have. Two key things you need to do to make money in the markets is to remove all feelings of “needing” to make money fast and of “needing” to be right about every trade. If you can do these two things you will be light years ahead of most traders who can’t see the forest for the trees.
Learn to lose gracefully
Trading is the ultimate test of being able to ignore short-term temptations like trading when you shouldn’t and risking more than you should, for the longer-term gain of being a profitable trader at month’s end and year’s end. We need to constantly remind ourselves than any one trade does not dictate our success in the markets, but what does is how consistent our behavior is in the markets, day in and day out. Consistency and patience are what makes traders money over the long-run; these traits are rewarded by the market whilst impulsiveness and unpreparedness are not.
The way that we ignore these short-term emotional trading temptations is to think about the bigger picture, which is that our trading results are measured over a large series of trades, not over a small handful of them. This means that getting upset about being wrong about any one trade is both irrelevant as well as counter-productive to making money in the markets. As traders, we have to learn to ‘lose gracefully’ by simply moving on after a losing trade. By “moving on”, I mean carrying out your trading plan as usual, not reacting after a losing trade, just take it in stride and always remember that you don’t have to be right on every trade to make money in the markets. If you’re trading with a high-probability trading strategy like the price action strategies I teach in my Forex trading course, you can make money over the long-run by sticking to your trading plan and understanding the power of risk reward.
Good trading, Nial Fuller