Win/loss ratio question

I have sometimes read that many traders have about a 50/50 win/loss ratio but still manage to do good because the winners are so great and the losses are cut short.
However, I also come across the view that a higher ratio of wins to losses is better, for obvious reasons.

I'm a little confused as to what to think about win/loss ratios. Should I strive to have a higher amount of profitable trades than losses or should I just focus more on letting the profitable trades ride and cutting the losses short?

My gut feeling is that it comes down to the individuals trading strategy, MM and such but I'd definitely like to get some others' opinions.

Thanks,
Mike

Well it's certainly better for your ego to have a high sucessrate.
If you are right 4 times out of 10 you can still be profitable with 1:2 RR Ratio but it just doesn't make you feel as good as if you're right almost all the time.

You've already got it - definitely down to strategy and the individual; what and how they trade.

You'll come across extreme examples of both ends of the spectrum in trading systems, like hideous ones where people bank on getting just 10 pips a day using a massive SL which have 95% success rate. But when they blow up, boy do they blow up, and you'll never hear from them again.

And the reverse of that, there are systems where really small SLs and no TPs allow for dozens of losing trades and the occasional mammoth winner.

Personally, like most things in life, I've found it easiest somewhere between the two extremes.

Thanks triphop for your response. Yeah, I kinda figured thats how it was . It's pretty wild how far the extremes can go. I definitely would enjoy having some of those mammoth winners that could allow for a bunch of losses.

I've experimented with tight SL allowing for a large lot sizes and it feels great when you time it right and a relatively large lot size is moving your way (I'm only dealing with about a 250$ mini so for me 1$/pip is pretty exciting). But it is difficult to stay the course when a string of losses happens. Not to mention with my account size I dont have much breathing room.

I think I'm more suited to this way of trading (lower win/loss ratio) but your probably right that it's better somewhere between the extremes.

Thanks also tjpld, you make a good point about how it does feel good to have a high success rate. That constant gratification from profitable trades may be easier to deal with than having to be patient waiting for the big winners. I'm thinking that that patience is maybe something that comes with experience.

I think a lot of it is your psychology. Some people are fine with a big win and lots of little losses, some are fine with a big loss and lots of little wins. Some prefer a middle ground, to be sure.

Some people prefer to take only the best trades, some people prefer to take any reasonable trade. One approach works for some, won't work for others.

Personally I go for the best rate of return I can get, but try to be flexible enough to know when to cut a trade short if it drops beyond a critical point or if it starts bouncing off a sup/res or whatever.

This is because I hate to watch a huge profit turn into a tiny profit... or a loss. It eats a bit at me, so I don't do it. Likewise I can't stand to let a huge loss run, I'd rather just take it and start out fresh the next day. I prefer to get in, get my pips, then get the heck out for the day and go do something better. "Take the money and run" ... works for me. Won't work for everyone tho, so you'll need to find what works for you.

Hi Mike,

I think you should strive to develop or find a SYSTEM that wins you pips in the longer term. Weather the system works more or less than it looses and/or weather it wins more per trade then it looses per trade (the reward to risk per trade) will be dictated by the system. The main thing is that it actually works in the long run AND proper MM so a number of losses in a row doesn't put you out of the game.

Good luck and best of pips

If you have even a 20% winning percentage, with good risk to reward ratio you will make money.

Let me give you an example: lets say your starting capital is 1000.00 and you take 10 trades a month, you lose 8 out of 10 with a max stop of 20 pips.

And of course you would NOT be risking all of your capital $1000.00 on every trade that would be a rokie mistake.

Say your risking a $100.00 everytime, 20 pips at a $1.00 x 8 = $80.00 in losses, but if your 2 wins are 60 pips in profit 3 to 1 risk reward, 60 pips at $1.00 x 2 = $120.00

120-80 = 40

A 40 pip or $40.00 gain after deducting your losses.

Hi jmttrader,

I look at trading like a game, no matter what system you use at the start you will be geting use to your system and have poor results most likely, as your skill level improves so do your results and as you get to the point where you have mastered your system hopefully your system will be giving you the income that you are after.

So basically what I am saying is that with experience your win/loss ratio will improve and your net profit will improve.

cheers

What you want is consistency, it's obviously good to have as many winners as possible, but this is not easy to achieve. What you don't want is to be in a position where you are on the edge of your seat waiting for that big winner to make up for all the losers, a system like this will do your head in (and probably your account also). I would be dubious that anybody is really making a killing with a 20% batting average.

Craig,

Making a killing is not what this is all about, look at any hedge funds performance reports are they making a killing ?

Trading is about controling risk!

It's only a figure of speech, don't take it literally, read it as 'making a profit' if you prefer. The performance of funds are determined by different factors from small traders, they simply can't trade in the same way due to size, so I think the comparison is erroneous.

I don't really understand the last part of your remark, isn't consistency part of controlling risk? Calculating expectancy (as in your post) is only one part of it, a system can have a positive expectancy but an awful equity curve. I personally would not be comfortable with 20% winners, but each to their own.

I consider myself an ultra newbie with a good amount of experience. I've been in it 4 months but I've probably spent more time than most people. for the last 4 months I've spent between 6-8 hours a day doing something 4X.

I tried all kinds of things and what made me lose the most money was scalping. I think you need to have an extensive amount of knowledge to be able to scalp successfully. Waiting around for the right candle formations etc, fundimentals, etc.

Lately (2 weeks) I've been more successful than I ever have and all I did was moved from the 15/30 min charts to a larger time frames. 4 hour, 1 day with the week and monthly charts to backup my trend direction. I never trade against the general trend and use only 10k lots. I don't use SLs I use hedging instead and always have 5 trades running at the same time. I use fibs/sup/res to find my profit point and I have had the best success rate that I have ever had. I'm usually in a trade anywhere from a few hours to a few days. I guess it's about 2 weeks now. I tend to lose track of time here in Jamaica. Since I started doing that I have done 93 trades about half demo and half live and have managed to only lose 6 of the 93 trades and the losses only on the demo. I am a bit more agressive with the demo. Of course. The losses I've had have been no more than 40-150 pips a piece which compared to the wins is nothing. It's a method I haven't quite figured out completely and I'm trying to refine things as I go along. I have a friend that's been trading for quite a while and he says if I can manage to keep it up for 3 months then I may be on to something. Sure hope so because this is the least amt of time I've ever spent messing with charting and the most success I've had.

One of the areas I lack knowledge is characteristics of the pairs I'm working with. I work with everything available that my broker offers.

Is there any thread on here where folks have discussed characteristics of pairs?

I've been enjoying this a whole lot. Especially since i pulled my live account out of a 1k hole.

The only guy I know for a fact who has consistently made money trading currency over nearly 20 years has a win loss ratio that looks something like this. Lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose, lose lose, lose, lose, lose, lose, win 900 pips.

Bottom line is he has way more losers than winners, but its a 20 something point stop loss and when he wins its for 500-1000. I'm not saying this is the only way to be a successful trader i'm just saying this is the way the one guy I know who is for real does it. And 500 is really the low end his wins are typically for 800+.

Win/loss ratio really does come down to psychology and it's effects it can have on the ability of a trader to stick with their system. I have around 4 years live trading in the fx market and it have found by far the best system with me ends up being those with smaller win/loss ratio's.

I won't go over previously covered ground by others here, but I did put up a snippet of my live trading over the last 6 months that might show you what I mean in numbers terms.

http://www.forexfactory.com/showthread.php?t=74304

I have to say I mostly disagree with that. Of course, if you have a very complex system then it might take longer time to master it (though I don't really believe in complex systems - as forex seems a lot more chaotic than it is ordered and thus simplicity seems more likely to provide at least some positive results). Anyway, a system as I see it is first - identify a pattern which will give you a COMBO of risk to reward AND win to loss that is overall positive (the advantage should be as LARGE as possible) and second - identify a way to take advantage of this pattern. Once both are set - the application should be close to mechanical with some basic defined level of discretion. Now there could be a BIG difference between 1 and 2 also - you could have a good reward to risk and high win to loss both even and 9 of 10 trades are winners if you back test - but then when you try to apply it you totally offset the odds in the way you SL and TP - in fact even when you find more or less the best way to do it - still you won't ever reach the full potential of the system - as it could be in theory (with minimum risk and maximum reward for each case that fits the system).

Now as I see it, if your system includes a LOT of discretion and you can improve it a lot without changing the basic rules but marely through discretion - then it's probably just still incomplete and what you achieve through "skill" could be achieved by refining the system as well. Alternatively, you could just be a lucky for a while - only time will tell that.

EDIT: All of the above of course applies to a technical system (or almost only technical). If your trading is based on fundumentals that's another story entirely, and I guess the best idea there is choose a strong pair with what's likely to be a long term trend and trade it. The specifics can be adjusted of course but as long as you know the trend the trick is juts to maximize profits, loosing on a market trending in a known direction is just stupid.

Lot of different opinions here on risk to reward. Traders I have spoken to suggested 1 to 3 with a 65-75 pip stop allows the market to breathe. Seems like a lot of newbies play to tight and get stopped out.

What's the point in discussing any specific numbers without the system attached to them ? I use an SL of 5 pips on average, so what ? I don't try to win 100 pips either. It's all subjective to system and time-frame and so on. Unless you're trading fundumentals maybe.

Fundamentals would typically be longer term so yes I would agree with that. However unless your automated it would see like a lot of effort with a 5 pip stop loss considering the spread is probably 2-7 pips. so you risk to reward goes off slightly unless you are consistantly grabing 25-35 pips on the profit side.

The spread is 0.9 - 1.2 and it all depends on WHERE & WHEN you put your SL, that's why having a SYSTEM that works is most umportant, as I see it at least..

Wow that is interesting. Where do you get small spreads like that? Are you trading level 2?