“How often are profitable traders right?” “Do they make money in every single trade?” These are the kind of questions which come to the minds of new retail traders who want to successfully trade in the stock market. Let’s see how much win rate is needed for a successful trader to make money in the stock market.
What is the meaning of win rate?
First, let’s understand the meaning of win rate. Win rate refers to the ratio of winning trades to the total number of trades.
Let’s suppose that you took 10 trades in a month in which you made money in 5 trades & lost money (stop-loss triggered) in 5 trades, then you had a win rate of 50%. It is a simple method to calculate the accuracy of a professional trader. The goal for any successful trader should be to have the win rate as high as possible because this will lead to higher profits.
What is a good win rate for profitable traders?
Many retailers think that a good win rate for profitable traders is close to 100%. Almost everyone knows a person who is “always right about the stock market”. However, in reality, the win rate for most successful traders lies somewhere between 45% to 65%! In fact, any win rate of over 50% is considered to be an amazing win rate for traders because it becomes impossible to lose money.
A mistake which new traders make is to make a profit in every single trade. However, that goes directly against the whole concept of trading! The goal of trading is to make money overall, not to make money in every single trade. To learn more about a profitable trading system, visit this article!
Significance of Stop-loss!
Stop-loss is one of the most important tools for a professional trader. It separates the real traders from the amateur traders! But why is the stop-loss significant when considering a win rate? This is because a trader’s ability to exit at the stop-loss determines his/her win rate.
If a trader exits his/her trade when the target is achieved in a winning trade but stays committed to a losing trade without respecting the stop-loss, then they will have a 100% win rate (in theory)!
However, a trader who doesn’t exit at a stop-loss will never be profitable! Such a trader would earn a lot of money in winning trades but will lose much more in losing trades. Trading cannot be successfully performed without a strong grip on the concept of stop-loss. To learn more about the usefulness of stop-loss, visit this article!
Do other factors affect your profitability?
1. Reward to risk ratio
A healthy reward to risk ratio is necessary for profitability of a trading system. As a professional trader, there should be no trades taken which have a reward to risk ratio of under 1.5:1. Ideally every trade should have a reward to risk ratio of 2:1 or more. A common mistake which new traders make is to risk more money than they can make in a trade! This strategy will never work profitably because in such scenarios, even a win rate of 55-60% is not enough to make money. The focus should be only on trades in which the reward-risk ratio is highly favourable for the trader.
2. Never risking more than 1% of your trading capital
Stop-losses are an essential part of the game in stock trading. These stop-losses can occur at any time and in any order. It is completely realistic for a professional trader to face 10 (or even 15 stop-losses in a row) due to bad market conditions or just bad luck. This is exactly why a trader should never take risks of over 1% of their trading capital. You do not want to get your account blown up by bad luck, so always limit your losses to under 1% of your trading capital!
3. Discipline to exit at Stop-loss
This is the key step which makes the entire trading process function smoothly. A trader always accepts his/her mistake and exits from a losing situation. The goal of trading is NOT to make money in every single trade! Even though it might seem like a bad idea to take a loss in the market, this stop-loss is designed to protect the trader from getting kicked out of the market. Simply put, a trader who survives the market for a long time will make money & stop-loss is a necessary tool for a trader to survive the market for a long time.
Story of two traders
Consider the story of two traders – Ram and Shyam. Ram has a winning rate of 55% and always exits at stop-loss. He also ensures a healthy reward-risk ratio of 2:1 (i.e. to win Rs. 10000, he only risks Rs. 5000). Ram also follows a proper risk management strategy i.e. he never risks more than 1% of his trading capital of Rs. 5 Lakhs.
On the other hand, Shyam doesn’t follow such rules. He never exits at his stop-loss, thus has a winning rate of 100%. He takes random risks – sometimes risking only 0.5% of his trading capital & sometimes risking 20% of his trading capital (if he’s feeling good about his trade). Also, he never follows a proper reward-risk strategy and is willing to take any trade which he sees fit.
Let’s consider how they will fare when they are trading in the market.
Even though Shyam has a better win rate (because stop-losses never get triggered), he still lost money over 20 trades because the losing trades ate up all the money which was earned in the winning trades. However, Ram who followed the rules properly was able to make a good amount of money in 20 trades (13% returns).
Conclusion
A win rate of over 50% is considered a good win rate for a professional trader. Even though the goal of a trader should be to master the art of trading and increase his/her win rate, it is completely possible to make money in the market with under 50% win rate as long as the trader follows every single rule of the trading book successfully. If you want to learn more about a professional trading system which can be used to make consistent profits in the stock market, visit this article! However, the final decision on trading depends entirely upon the reader.
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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