Most traders should not take trades when the reward is less than the risk because an unrealistically high winning percentage is necessary to be profitable over time. For example, if a trader risks three points to make a one-point scalp, he has to win about 80% of his trades just to break even (and the goal should never be to just break even). To make a living trading this risk/reward profile, the trader would have to win about 90% of the time. Even though he won on 70% of his trades, he still would have a net loss. None of the traders/investors (Buffet included) can be anywhere near 90% in their lifetime.
profit= (winning percentage * winning amount ) – (winning percentage * losing amount)
if u win only 50% but ur winning amount is $10 and ur losing amount is 5 then
profit=50%*10 – 50%*5 = 5usd.
This is an equation for any trader or investor. winning amount / losing amount is the same ask risk / reward.
To make money as a trader or investor u have to concentrate on 2 factors, win/loose percentage and the amount of money u win or loose. It takes me a long time to understand it.
most people r singleton. They think only about winning percentage. They look for one with 100% winning record. It doesn’t exist.
We laugh at Jim Cramer because his winning ratio is a bit more than 50%. A monkey could have better winning percentage than him. But his winners make him a boat load of money. His loosers cost him half a boat load of money. In the end, he profits.
What does all of these mean? Hold on to your winners and get rid of losers fast. This is how we do it in life. Yet in trading, investing we hold on losers.
A third variable is probability. High probability = large stops(loose big). This screw up the risk/reward factor.
If you pick turning points (top or bottom), probability is low, risk is low but your reward is huge -> low winning percentage, high reward.
If you trend trading, your probability is high but your reward is less -> high winning percentage.
The hardest part is to recognize and accept your losers and get rid of them. To know a looser, it takes experience. Experience = time * many encounters until you find a method that you are comfortable with.
It means ‘get rich ez’ and fast in trading is not gonna happen. The only one gets rich fast and ez is the one who is promoting it and selling you hope & dream. Want to get rich fast and ez? People like to enjoy life. Sell them anything that makes them high. They will buy it.
Trading is about grinding. It took me years of losing money before I could break even. Most people would give up.