Hello traders! At the time of this writing I am teaching in beautiful Atlanta, Georgia. On the Tuesday of class, I went to dinner with a former student who wanted to talk about his (perceived) lack of consistency in his trading.
During our conversation, this student, let’s call him Steve, complained that he wasn’t where he wanted to be in his trading. When we talk about consistency in our trading, many different traders refer to different things. Let’s break this down a bit. Many traders complain about a lack of consistency in their profits, meaning how much money they make on a daily or weekly basis. As a day and swing trader, I can certainly attest to the fact that earning a steady paycheck day in and day out can be difficult! Many new traders believe that they will come to the market and earn themselves a consistent $100, $500, or $1,000 a day. While earning an average of those numbers is definitely attainable, earning a fixed number every day is actually difficult. You will have some losing days, some days where you make just a handful of pips, and occasionally those days where you can seem to do no wrong! Money seems to be raining on you from the market! Those are the days that can really cloud your thinking on what your true abilities are. If you make $10 on Monday, $50 on Tuesday, $0 on Wednesday, lose $30 on Thursday, and make $1,000 on Friday, don’t go shopping for a new Maserati on Saturday! If you’ve done any reading on statistics and other math stuff, you need more inputs than just five days to truly find out how profitable your are in trading. After a couple months of active trading you should have a relevant sample size. After 60 trading days, if your average income is $100 per day, you could “expect” to make that on a consistent basis. When asked, I recommend traders use an average of their last six months of income to determine what they can afford to go shopping for. $100 a day is probably not enough to go Maserati shopping, but $1,000 a day? Hmmm…
Another complaint Steve had about his trading was that he wasn’t satisfied with his win/loss ratio. This ratio is commonly expressed in number of wins to number of losses, on a scale of 10. For example, if you make money on 4 trades and lose money on 6 trades your win/loss ratio is 4:6. Easy enough? Steve wanted to get his win / loss ratio up to 8:2 or even 9:1. This is another statistic in trading that is commonly misunderstood. By itself, the win/loss ratio is IRRELEVANT. WORTHLESS. IT DOESN’T MATTER. By itself, that is. You have probably seen on the internet many advertisements about trading services, stating things like, “Last year we made money on 95% of our trades! Subscribe to our service now!” These ads make me laugh. How much are they making on their profitable trades, and how much are they losing on their losses? If you win on 9 trades and make 2 pips per trade, congratulations you made 18 pips. If you lost 20 pips on your 2 losses, you are now down 22 pips overall. You aren’t making money, but your win/loss ratio is great! Without knowing what your average wins are and what your average losses are, we have no idea if you are profitable or not. It is probable that you can make a fine living with a win/loss ratio as low as 1:9, if you are very good at managing your winning trades. A bit more reasonable and attainable ratio would be 5:5, but only if your realized average wins and average losses work out to be better than 2:1.
In essence, Steve is doing just fine as a trader. But being somewhat new and busy with work and family, he was losing focus on how to truly improve in his trading. In my opinion, the best way to make more money in trading is getting better at managing your winning trades. Of course, I expect him to continue to use our Core Strategy of buying in quality demand zones and selling in quality supply zones. Good traders take the small losses, but the letting your winners run seems to be the hard part for some. After every completed trade, I expect the new trader to look back and examine the reasons for where they got in and how/why did they exit. When examining the exits of your trades, do you happen to find that they continued on without you? How far did they go? Learning to better manage your winning trades will certainly be easier when you examine what happened to your old trades.
So what is the takeaway this week? Don’t measure your trading consistency on a day to day basis, but week to week or, even better, month to month. Accept that high win/loss ratios are unnecessary to be profitable in trading and get better at managing you winning trades.
Until next time,