Yesterday I wrote about the three elements needed to assess and compare trading systems (Thoughts on Trading System Performance). Today, I want to tackle more specifically the topic of win rate or win%.
Win rate, of course, is the percentage of trades that end up profitable. It is calculated as number of winning trades divided by the total number of trades.
We all see trading system advertisements, and probably on a fairly continuous basis. Many of them go to great lengths to hype their win rate. It’s not unusual to see “90% accurate!” or something not unlike that. As I noted yesterday, win rate cannot be considered a good judgement of the quality of a trading system, especially taken just by itself. There are other things important to look at too.
So why do people get so wrapped up in win rates?
Well, the first reason is that the uninitiated do not know any better. Unless you have actually spent some time looking at trading system performance assessment, you probably don’t realize what that means and how to do it. As a result, a strong win rate sounds very impressive. Without knowing it, you make an assumption that winning trades and losing trades are equal. Obviously, that may or may not be the case.
Another reason people get caught up in the win rate is because they have a need to be “right”. If you are right more often than not, then you can feel all warm and fuzzy. But are you making money? Not necessarily.
Besides, trading is not about being right or wrong. It’s about making good trades and about making money. You can make an excellent trade and still lose money because the market makes an unfortunate turn. Similarly, you can make a horrible trade and still make money just through sheer stupid luck.
Here’s something to consider as you think about your trading system, be it one you develop or one you get from someone else. Can you handle a low win rate? Can you handle going through strings of losses waiting for the big winner and the equity drawdowns that implies? If not, then you will want to focus on systems with higher win rates. Doing so will reduce the likelihood of your jumping off the system when things get a bit rocky.
Of course, the best solution is to realize that win rate is only one part of the equation and that in the end it’s all about returns.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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- Thoughts on Trading System Performance
Why You Shouldn’t Fixate on Winning Percentage in Your Trading
Trading System Rules I Disagree With
