Can the winning rate of trading be increased to 80%?
Friends who have engaged in trading have all experienced a certain feeling: the moment when you close a position that you've made a profit on is just too exhilarating. The overwhelming sense of achievement, victory, and self-confidence seems to reach the pinnacle of life, and this joyful feeling even surpasses the act of making money itself.
Therefore, many traders are obsessed with finding trading strategies with high win rates, hoping that their trading success rate will be a little higher, and even higher, ideally making every single order correct. This way, trading becomes incredibly joyful and stress-free.
But does such a perfect trading strategy really exist in the world?
Actually, I don't know either, as I've never seen one. Today, I will still start from factual evidence and present a trading system with a win rate of 80% to see how its back-tested profit results are, and how we should view and choose our own trading win rates.
1. What if the trading system's success rate reaches 80%?
Let's test it out.
Using a dual-period trading strategy, with the hourly chart of gold as the short period, we enter trades using the resonance of moving averages and trend lines, and set the stop loss at the high and low points of the daily long period. The profit target is fixed at 50 points.
With the above trading logic, over three months, there were a total of 30 trades, with 6 losses and 24 wins, resulting in an exact 80% win rate. However, the overall outcome was a loss of 528 dollars.
Among all the trading records, the green orders are all profit-taking orders, with each profit being 500 USD. But due to the large stop-loss space, the amount of the stop loss is much higher than 500, with the largest single stop loss being over 2400, nearly five times the profit.
The success rate reached 80%, but the result was a loss.The main reason for the loss is that the profit-to-loss ratio is too small and unreasonable.
I then re-calculated all the trades, keeping the stop-loss unchanged, and set the exit point to a fixed 1500 points for these 30 trades.
Due to the increased profit space, some orders changed from profitable to stop-loss. The success rate became 18 wins and 12 losses.
The 18 successful trades made a profit of 18 x 1500 = 27,000. I tallied the remaining 12 stop-loss orders, with a total stop-loss of 24,040, resulting in an overall profit of 2,960.
With all other conditions remaining the same, by increasing the profit-to-loss ratio and reducing the trading success rate, the result surprisingly turned from a loss to a profit.
This is not hard to understand because we choose trades that are consolidation breaks, which are patterns where trend lines and moving averages resonate and break.
Before the break, there is a long period of consolidation, and such a break is likely to result in a significant price movement. Each time, in pursuit of a high win rate, we only take a 1:1 profit-to-loss ratio, wasting the profit space that the market should have had.
It's like a bird that could fly to a height of 100 meters, but you trimmed its feathers, so it can only fly to 20 meters, wasting that 80 meters of space.
The market alternates between consolidation and trend, which is a fundamental characteristic of price movement. Once the consolidation range is broken, the market will tend to surge or fall.
Some friends may also ask, how much will the market surge after the break? Should the take-profit be set at 50, 100, 150, or 200 points, which one is more appropriate?Every trading system has its own criteria for confirming direction, entry, and stop-loss, and the cycles of different trading systems also vary, leading to different inertias after a breakout. So, what should we do?
In fact, it's quite simple, just as I mentioned earlier, keep the standards for stop-loss and entry unchanged, and set different profit-taking methods for backtesting. Then, separately tally the situations with different profit-taking strategies, and the data will speak for itself.
Here, I would like to share with you the three aspects to consider when determining the standards of a trading system.
(1) Is the profit substantial?
(2) How few are the consecutive losses? Can they be tolerated?
(3) In the face of uncooperative market conditions, how severe is the decline? How is the drawdown?
These three points are the core of determining whether a trading system has a profit advantage. It's not enough to just look at the amount of profit. The second and third points determine how well the trading system can be executed. A trading system that can make money and is easy to execute is an excellent trading system.
Sometimes, it's even completely worthwhile to sacrifice some profit for the sake of better execution, because no matter how large the profit, if it's not in hand, it's all for naught.
So, can the trading win rate reach 80%? Of course, it's possible, but the profit outcome may not be ideal.2. How do we view the issue of high win rates in trading?
(1) There are three factors that determine trading profits: win rate, risk-reward ratio, and reasonable trading frequency.
Among them, the win rate and risk-reward ratio are the most important and are interrelated factors. Merely pursuing a high win rate or a high risk-reward ratio will ultimately lead to unsatisfactory outcomes.
A high win rate inevitably comes with a low risk-reward ratio, and vice versa. Many friends have also asked me if it is possible to achieve both a high win rate and a high risk-reward ratio at the same time.
My answer is no. Because I have experimented and searched, I have found that this is a form of perfectionism, and it simply cannot be achieved simultaneously. If one insists on pursuing it, the likely outcome is a loss.
The win rate and risk-reward ratio are inversely proportional, like the two ends of a seesaw; if one is high, the other is low. If both ends are high, then the seesaw would cease to exist.
(2) In fact, having a win rate that is too high and a risk-reward ratio that is too low can also lead to serious psychological issues in trading, making it difficult to execute trades.
When the win rate is too high and the risk-reward ratio is too low, a single losing trade can result in a significant loss, turning many profits into nothing.
In the example reviewed above, a single stop loss of 2400 is equivalent to the profits of five winning trades. This can easily induce a fearful emotion in traders. Once emotions arise, they can lead to trading distortions. Even if you have a trading system, it becomes difficult to execute it.What's even more terrifying is the consecutive errors in a trade, or the occurrence of such errors within a very short interval of time.
In the example of the review mentioned above, after the first stop loss at 1600, there was a profit-taking after two intervals, followed by a stop loss at 2400, then another profit-taking after two intervals, and yet another stop loss at 2100.
In the short term of 7 trades, with 4 correct and 3 incorrect, the profit was only 2000, while the loss reached 6100, which is a very large loss margin, and at least 8 consecutive profits are needed to recover the loss.
At this point, trading in the actual market becomes very nerve-wracking, worrying about what to do if there is another mistake? The mentality would completely collapse.
(3) A high win rate is more about satisfying one's psychological needs rather than the need for profit.
We need to think about what we are trading for? Is it for the momentary happiness, or for making money? Never put the cart before the horse.
We often have this kind of mentality: judging right and wrong based on a single profit and loss.
For example, if we fail once or twice, we feel that our trading strategy is not good, and even feel that we are very unsuccessful, which is a very short-sighted behavior.
We are not only trading once, or trading for a day, a week, or a month, we are pursuing long-term profits in the market.
Stretch the timeline infinitely, and the profit and loss of one or two times in front of us is nothing. Just like you once passed gas loudly in front of many leaders, you felt very embarrassed at the moment, and you could even dream about it in nightmares, but looking back after many years, you might not feel anything, it's the same principle.Reviewing all of one's past trading records, the capital curve, much like an uptrend on a candlestick chart, cannot possibly be a straight line ascending; it will inevitably have zigzags, which are the results of being right and wrong. This is perfectly normal.
To desire a straight line shooting straight up into the sky, perhaps only a deity could achieve that.
We might also entertain this mindset: trading is for happiness, for the satisfaction of our own pleasure. If trading is no longer enjoyable, why bother with it?
This is a very dangerous notion.
We should ponder, how can we be happy with trading? We are happy when we make a profit. If you go all-in and lose everything, the thrill might be for that very moment, but what follows is endless pain, which is a base form of pleasure.
If you follow trading rules, restrain your desires, and ultimately make money, that is a higher form of happiness.
When I first started trading, I had an obsession, thinking that as long as my order was positive when closed, I felt satisfied, and I could be happy for the whole day. Even if I ended the day's trading by losing a penny, I felt like a failure.
That's how we are, indulging ourselves time and time again, blindly pursuing a high win rate, neglecting the original intention of trading, and losing our initial aspirations.
Therefore, trading should not blindly pursue an extremely high win rate, or an extremely high profit-to-loss ratio, or an extremely high position size. Under any extreme settings, explosive results can occur, and we may not necessarily be able to bear these outcomes.
3. What kind of win rate should we choose?Before delving into this issue, we must first ponder: what is the most difficult thing in the world? The answer is "making money."
The notion that trading, something that can supposedly "make money easily" with just a few mouse clicks, is inherently illogical. In reality, the challenge of trading is not reflected in tangible patterns but in the abstract realm of psychology, and the psychological difficulty is far greater than that of patterns.
Therefore, to make money in trading, one must overcome the psychological barrier. To overcome this barrier, one must be able to endure, to make sacrifices, to endure grievances, and to anticipate emotional pain.
When the market retraces and profits are given back, no matter how anxious, fearful, or bitter we may feel inside, we must hold on, for enduring hardship is not the same as enjoying pleasure.
There is a consensus online that the win rate for trend-following trades will not exceed 30%, which fully demonstrates this point.
Thus, if you wish to make money with a high win rate and in a carefree manner, this is essentially impossible. To truly make money, one must endure the challenge of an acceptable win rate.
So, how should one choose their win rate?
After years of my own testing, a trading win rate above 30% and below 55% is a relatively balanced and ideal level.
Below 30%, the win rate is too low, making trading too arduous and challenging, posing a significant psychological challenge that is difficult to manage well, and there is no need for such self-inflicted torment.
Above 55%, it is easy to waste market opportunities and incite an inner desire to win quickly, which ultimately leads to trading failure.Choose a suitable ratio for yourself between 30% and 55% win rate, combine it with the profit-loss ratio to form a trading system, and then enter the live market after testing and refining it. Even during the execution process, you may encounter some hardship, but it won't be too difficult, allowing you to persist. Only by persisting to the end can you make money.