The Myth About Trading “Win Rates”
Have you ever heard a trader describe their success in terms of a “win rate?”
You probably have, its a popular way for signal services to market their offerings as well.
Saying something like “I have a 90% win rate on my trades” sounds impressive but it actually doesn’t speak to a trader’s success at all. Win rate is not important.
At the end of the day all that matters is how much profit a trader is able to pull out of the market.
A win rate doesn’t mean anything if its established taking trades with a poor reward to risk setup.
Below I will break down a little more how this metric is not something you should be using to measure your, or anyone else’s success.
Getting a High Win Rate is Easy
Whenever you hear someone talk about the percentage of their trades that are profitable there’s no reason to be impressed.
It’s actually quite easy to develop a strategy that wins 95% or more of the time. In fact, anyone can create a strategy like this in any stock that has options.
In order to do this all you need to do is find out of the money options with a very low delta, and sell them.
Selling options that have only a 5% chance of finishing in the money will earn you profits 95% of the time, but as I’ll describe below, that doesn’t necessarily mean the strategy is successful.
It’s All About Profits
Even with a 95% win rate it’s possible to have an overall loss in the strategy.
The above options strategy will indeed lose only 5% of the time (in theory) but the times that it does lose it could have the potential to blow out your entire account.
Is that a solid strategy then?
Absolutely not. If you make money in 19 straight trades but the 20th erases all of your previous gains and then some the strategy is a loser.
Here you can see that the win rate doesn’t at all translate to actual trading success. It all comes back to reward and risk.
If you set up strategies where your profitable trades are larger than your losing trades then its possible to make money with a poor win rate.
Keep this in mind when you hear other talk about their success and when you are thinking about how to measure your own.
Set the Right Goals
As you can see above trading for a solid win rate is not the best way to measure success.
Make sure when you are setting goals for yourself you are measuring them in a way that will actually translate to something meaningful.
The goal of an AlphaShark is profits, not some arbitrary win percentage.
AKA, “The Alpha Shark”