To trade or invest successfully you obviously need some type of strategy.
At a minimum your trading strategy should include: your stock analysis and selection method(s), as well as your risk, money and trade management techniques.
Although it is crucial to have a sound strategy, it is a misconception to think that a profitable trading strategy requires an exceptional high accuracy (or success) rate.
This misunderstanding leads many traders and investors on an endless search for the ‘perfect system’. Strategy accuracy is important, but it is not the primary reason for achieving profitability.
The Low Down on Strategy Accuracy
The first thing you need to understand is no trading or investment strategy will ever be anywhere close to 100% accurate. If you’re aiming for this sort of result, stop right now and find some other hobby to lose your money on.
Get this in your head right now – The perfect trading strategy with 100% accuracy DOESN’T EXIST.
If you believe you can find or design a system that is 100% or even 90% accurate you’re only setting yourself up for a massive disappointment. And ultimately you’ll be one of the countless ‘market failures’ that go bust searching for that fool-proof ‘holy grail’ trading system.
Typically most trading strategies have between a 30-70% success rate (success rate is also referred to as accuracy rate).
In fact, it may surprise you to know that a trading strategy with a 70% accuracy rate is generally considered to be at the top end for performance when it come to trading or investment strategies.
So what is a strategy’s accuracy or success rate and how is it calculated?
Calculating a Strategy’s Success Rate
The formula for calculating a strategy’s success rate is very easy.
The result is then multiplied by 100 to convert the number to a percentage.
So the final calculation looks like this:
Let’s look at an example:
If you made 30 trades and 20 of them were winners and 10 were losers, your success rate (or accuracy rate) would be 67%
What are Typical Accuracy Rates?
Most profitable traders and investors typically expect at least 50% of all their trades to be LOSING trades.
That equates to a success rate of less than 50% (i.e. more than half of all trades made will lose money).
Some of you may be a little stunned by that, but wait there is more……
If we take a profitable trader’s winning trades and break them down further, you will find:
- 25% will provide a small profit;
- 15-20% will provide a reasonably sized profit; and only
- 5-10% will provide a MEGA profit.
That’s it only 5-10% of all winning trades will provide the majority of your profit.
This is why the trading adage “let profits run and cut losses quickly” is so important.
Now you may be thinking that you can come up with a system that has a better than 50% accuracy rate. That may be so, but in reality most people are not super traders or investors’
Instead they are typically Mr. or Mrs. Average and a 50% accuracy rate for Mr. or Mrs. Average is more than sufficient to be profitable over the long term.
Don’t get blinded by the notion of trying to achieve a high accuracy rate with you trading system – the effort will most likely be counterproductive.
Accuracy Rates are important, but the power of profitability lies in your understanding of the - Probability of Your Trading Strategy.
‘The No Bull@#t Guide to Achieving Profitability’
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‘Til next time, I wish you the ultimate in trading success.
