Winning Percentages and Why They Are Overrated?

Filed under: Learn Forex Trading |

Screen shot 2013-03-25 at 11.28.11I think that a lot of new traders to the forex markets often place a little too much emphasis on their winning percentage. The ‘winning percentage’, for those of you that are not familiar with this term, is quite literally the percentage of your total trades that produce a profit. So, if you make one hundred trades, and sixty-two of these trades make a profit, then you have a 62% winning percentage. However, a lot of traders fixate of this figure – when the only figure that should really matter is the bottom line profit/loss figures. Let me explain…

 

Let’s say that you have a 95% winning percentage. Would you be happy? Most people would answer an unquestioning ‘yes’ to that – but it is not quite that simple. Those 95% winners might only have resulted in gains of say $950, while your 5% losers may have resulted in a $1000 loss. Thus, your overall profit/loss figures, despite having a winning percentage of 95%, would be -$50. A lot of system creators manufacture such high winning percentages, and show a great track record for three months or so before one giant loss wipes out all of the profits. It goes against human nature, but in the forex markets, having a lower winning percentage and a higher risk-reward ratio can often be more profitable.

 

Let’s say that you have a risk reward ratio of 1:4 on each trade and you have a 30% winning percentage. Although this might not sound very good, out of a hundred trades and risking 1% of a $10,000 bank on each trade, your 70 losers would account for a $7000 loss, while your 30 winners would account for a $12,000 gain, leaving an overall $4000 profit. As you can see, winning percentages do not really matter – and all that really matters is your bottom line profit/loss figures.

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