Why is looking at winning percentage alone dangerous? Perhaps an example will help. Take 2 trading systems - in trading system A, 90% of the time you win $1. The other 10% of the time you lose $10. In trading system B, 10% of the time you win $10, and 90% of the time you lose $1.The first solution is to use multiple lots, shares or contracts. However, if you are still entering all in, exiting all out and scalping profits on small moves, you are taking high risk-to-profit ratio trades that will eventually eat into you capital unless you have a very high percentage of winning trades. (Note: when you enter a trade with multiples, your risk should not exceed 1 percent of your capital.) |
The next solution is to use multiple lots but scale out. So, say you enter with 2 contracts, with a 1.5-point stop loss. As the market moves in your direction, you can exit 1 contract at 1.5 points. Immediately, you have satisfied the emotional need to take profits, and your risk is eliminated because, if you don't move your stop loss and the market turns against you, your overall trade will break even.
Alternatively, you can play it tighter and move your stop to break-even and protect your banked profit of 1.5 points. Either way, you can trade your remaining contract, the runner, in a more technical, less emotional manner because you have put yourself in a position to capitalize on a bigger move on an auto-trade, with your runner protected by your exit on the first contract.
Most people will select system A, since it wins 90% of the time. After all, who can handle winning only 10% of the time? While it is true that low winning percentage systems are hard to psychologically handle (it is not easy being wrong 9 times out of 10), sometimes those are better long run systems.Stock Trading System
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