How important is your win loss ratio?
In today’s article, I want to look at the win to loss ratio and its importance to a trading system.
Let me start by posing a conundrum; would you prefer to walk down the high street with a verified badge on your chest showing off a 92%-win loss ratio or would you prefer to drive down that high street in a top of the range sports car?
The bottom line is that the win loss ratio is just a measure of a system and we should only focus on being profitable.
What happens if we get fixated on our win ratio?
Focusing on our win ratio can result in premature exits from profitable trends, and holding losing trades far too long. Systems based on a high win loss ratio are also higher risk. They usually result in few losses, but these losses are extremely large and can massively damage your account.
If we get emotionally upset by taking a loss then it suggests that we are more interested in being right than focused on being profitable.
What win ratio should we aim for?
The answer in short is that we should not focus on the win loss ratio as this is only a measure of our system. Our focus should be entirely on our trading rules; to make a profit.
How then should we use our win ratio?
Different trading systems need different win ratios to be profitable.
As an example, if a system has a win loss ratio of 2:1, and we risk $50 per trade, then a win will produce $100. In this scenario, so long as we have a win ratio above 34%, then we will be profitable.
To demonstrate this let us say that we take 100 trades and win 34% = 34 trades.
Wins = 34 x $100 profit = $3,400
Losses= 66 x $50 loss = -$3,300
Total profit $3,400 – $3,300 = $100.
Now, taking 100 trades to only make $100 is not profitable. So setting a minimum 50% win ratio would be more reasonable to trade this system, which yields:
Wins = 50 x $100 profit = $5,000
Losses= 50 x $50 loss = -$2,500
Total profit $5,000 – $2,500 = $2,500
We then test the system over 10 rounds of 100 trades and find out if the system is profitable.
If the system is profitable, we then focus entirely on the trade rules and executing the trades. We are not concerned about losing trades since we only need to win 50% of our trades, and that the system will provide that.
Closing out trades the Hawkeye Tomahawke FX Suite
In the Tomahawke scalping system, the strength of a currency can quickly change since we are trading fast time charts. If we focus on the current combined profit of all trades at one time, and reach our profit target, we should be happy to close out the trades, even if 4 are profitable and 2 are losing trades, as shown in the example below. Don’t be concerned that the -$5.04 trade would be counted as a losing trade as its value is insignificant to the overall profit.
In summary, my hope is that this article has helped you think about win loss ratios in trading. Understanding win loss ratios will aid you in becoming a better trader.
If you would like to find out more about the Hawkeye Tomahawke system, please visit us at https://www.hawkeyetraders.com/tomahawke-forex-trade-room/
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