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This is the age old argument of Winning Ratio versus Risk/Reward fight. Many traders argue that having a high winning percentage is most important, and and risk/reward ratio is secondary. Others argue risk/reward is primary, while the winning percentage is secondary. Now guys, I KNOW BOTH IS IMPORTANT, as always, but which one do you tend to look at first? Which one is more important to you? (Please remember the emotional a psychological factors as well).
Lastly, how do YOU personally find a medium or common ground between the two? (Obviously you dont want the winning percentage to be to low or the risk to be too high)? Let's discuss.
For instance:
Scenario1: Would you consider an average winner of $90, and average loss of $150 dollars and a winning ratio of 70% a good strategy?
Scenario 2: Would you consider an average winner of $310, and average loss of $150 dollars and a winning ratio of 45% a better strategy?
I would prefer the first Scenario, just because as far as mental and psychological stress as well as profits, this is a little more easier to trade than constant losses. You may also compound faster with small wins everyday instead of waiting after a few losses to compound the win.
Risk:Reward is definitely my primary focus as I evaluate a set up with Win / Loss ratio as secondary. I am shifting all of my position/longer term trading to working set ups with 3:1 (where 1 win equals 3 losing trades). Heck, a 55% to 58% Win / Loss ratio hitting an average of 3:1 on all trades is a very comfortable trade system. You start hitting 60% or greater Win / Loss ratio working with 3:1 and the system profitability can get dynamic.
Examples of 3:1 Momentum Trade set ups I am trading intraday;
They have the same significance. If you run my RRCalc you will see that trade 1 is equivalent to trade 1:1 with 60% and trade 2 with 69%, so trade 2 is much much better.
“One common adage on this subject that is completely wrongheaded is: you can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.” – William Eckhardt
IMO: This arguably the best piece of advice for taking your trading to the next level !
