Long time ago, when I first started trading, I was focused on being right/winning. I wanted to win all the time. I tried to have a high win loss ratio. I wanted an A in trading like in school where if you get something like 94% of the questions right, you get an A and teachers and parents congratulate you.
I hear/see traders talk about high win loss ratios like it's critical.
But, what if you are only right 30% or less of time? (We know that in school, that is a solid F. You can't pass and graduate. You are a failure. A loser, if you will.)
Scenario 1:
You are right only 30% and you have a net profit of $30,000. You are wrong 70% and you have net loss of $7,000.
Net result is a net net profit of $23,000 even though your win loss ratio was 3:7 which is way less than 50% win rate.
Scenario 2:
You are right only 10% of the time but have a net profit of $100,000 and you are wrong 90% of the time but have a net loss of $9,000?
The second scenario has a much worse win loss ratio than the first scenario but has a much higher net net profit of $91,000.
It seems counter-intuitive that decreasing the win loss ratio would result in a much higher net net profit.
So, it seems that average $ profit to average $ loss ratio is more important than the win to loss ratio.
Am I right?
How much should one pay attention to the win loss ratio?
I do know that a high win loss ratio is less painful than a low win loss ratio and might even be required to keep a sane mind.
What do you guys and gals think?
I hear/see traders talk about high win loss ratios like it's critical.
But, what if you are only right 30% or less of time? (We know that in school, that is a solid F. You can't pass and graduate. You are a failure. A loser, if you will.)
Scenario 1:
You are right only 30% and you have a net profit of $30,000. You are wrong 70% and you have net loss of $7,000.
Net result is a net net profit of $23,000 even though your win loss ratio was 3:7 which is way less than 50% win rate.
Scenario 2:
You are right only 10% of the time but have a net profit of $100,000 and you are wrong 90% of the time but have a net loss of $9,000?
The second scenario has a much worse win loss ratio than the first scenario but has a much higher net net profit of $91,000.
It seems counter-intuitive that decreasing the win loss ratio would result in a much higher net net profit.
So, it seems that average $ profit to average $ loss ratio is more important than the win to loss ratio.
Am I right?
How much should one pay attention to the win loss ratio?
I do know that a high win loss ratio is less painful than a low win loss ratio and might even be required to keep a sane mind.
What do you guys and gals think?