Losing Trades - Why we must Accept Them

No-one can make winning calls 100% of the time, no matter how good a trader they are.

Losing trades are part of the game. The key to success is to manage your losses by cutting them early and keeping them small, whilst either letting your winning trades run for as long as possible, or making sure they at least exceed your losing trades.

Let me give you a few scenarios to demonstrate this point:

Trader A is a short-term trader who looks for 20 Nifty points per trade and uses a stop loss of 120 points to give himself every chance of hitting these targets. His winning success ratio is an impressive 90% and he averages 10 trades per week.

Trader B is also a short-term trader but he is much more cautious. He looks for profits of 25 points and uses a stop loss of 10 points. His success ratio is just 50% and he also averages 10 trades per week.

Trader C is more of a position trader. He looks for profits of 150 points per trade and uses a stop loss of 25 points. His success ratio is just 20%, ie 80% of his trades are losing trades, and he too averages 10 trades per week.

Which trader is the most profitable?

Well let's work it out:

Trader A, who has the highest amount of winning trades (and probably the biggest ego), averages 60 points per week.

Trader B, who is only right 50% of the time, averages 75 points per week.

Trader C, who is only able to identify winning trades 20% of the time, averages 100 points per week.

The point I want to make is that you don't need to spend your time looking for trading methods that have very high success ratios. Losing trades are not necessarily a bad thing. As long as your winning trades more than compensate for your losing ones, you are always going to come out ahead, even with a relatively low success ratio.