Losing Trades Are a Big Part of Winning Systems

Losses are part of trading. In fact losing positions make up the majority of many winning trading systems. That is, many winning trading systems have a winning percentage that is less than 50%. It seems counter intuitive that you can be wrong more than you are right and still make significant money in markets. But that truth has been proven by many well known traders.

So how is it that you make money with a winning percentage that is less than 50%? The answer is simple: do not focus on your winning percentage and rather focus on managing risk. Think about it this way:

You make 100 trades on the year, 60 of them are losers and 40 of them are winners. This gives you a winning percentage of 40% on the year. All of your losers lost $1,000 (1R) and all of your winners made $1,750 (1.75R). How did you do with your 40% winning percentage? You made $10,000. (40 winners x $1,750 = $70,000 minus 60 losers x $1,000 = $60,000 = total win of $10,000).

Risk management is the key here. Ensuring that your losers are small dollar amounts every single time is what allows your winners to make you money over the long term. The first thing to do in every trade is to know how much you will lose if the trade goes against you. For me, it is rarely more than 1% of my overall portfolio. So if I’m trading a $100,000 account, I will set a stop that ensures I lose no more than $1,000. This becomes the R that I mentioned above. 1R=$1,000 or in other words, I’m Risking $1,000 on each trade.

A simple risk management strategy is more valuable in trading than a great winning percentage. Embrace your small losses for they keep you in the game long enough to see the big winners.

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