This article could be life-changing for many traders. I understand that it is “sexier” to talk about indicators, entries and strategies, but this article has the power to give you the biggest aha moment in your trading career. We are going to talk about winrate and how a trader can actively change their winrate. Do you want a high winrate? Do you want larger winners? No problem, you can change that.
All trading books and professional traders will tell you that “you need to find a trading strategy that fits your personality” and “you need to make your trading strategy your own”. But they don’t mean that you need to use a different indicator, change the period on your moving average or try a different timeframe. What they mean is that you must think about adjusting the parameters around your strategy to make it fit your psychological profile.
The way you place stops, targets and exit trades has a huge impact on all areas of your trading. It affects holding time, how long you will be in trades, how easy it is to recover from drawdowns, how frequent and severe losing streaks will be, how volatile your account growth is and so on. All those points directly impact your trading psychology and you need to spend time thinking about what your personal trader profile is. What are your strengths? Where are your weaknesses? And how can you address those and make sure that your trading strategy fits yourself?
Let’s get into how you actually control the winrate of your trading.
Intro: RRR and winrate
Let’s start with the default scenario and let’s assume that our trading strategy has an average 50% winrate with a 3:1 Reward/Risk ratio (RRR). This is a super profitable system if we just look at the expectancy. With a 50% winrate, the RRR only needs to be 1:1 to break even, so 3:1 will provide massive returns.
But maybe the trader wants to explore different options and see how he could improve the system even further and adjust it to his/her psychology.
Small target leads to higher winrate
The most important point is that you need to understand that there is a direct relationship between the way you set stop loss, take profit orders and the resulting winrate. I will be talking a lot about this concept now.
To make this easier, you just need to ask yourself: is it easier or more difficult for the price to reach the target and the stop loss?
In this first scenario, we set the take profit target closer. Everything else is staying the same. It is the same system with the same rules for entries and stops. Only the target has been changed.
Logically, what will happen?
Compared to the first scenario, the price will have an easier time reaching the target, right?! Why? Because the target is set closer and the price does not need to travel as far. Sometimes, the price will come close to the wider target in the first scenario but the price will not reach it.
Naturally, the winrate will then see an improvement with a closer target.
At the same time, the RRR will go down and your winning trades will be smaller compared to the first scenario. This is the trade-off. And there is always a trade-off.
You can’t have both and that is where most traders will go wrong. They want to have a high winrate and a high RRR. And while trying to achieve that, they will break their system because a high RRR system will naturally have a lower winrate and there is nothing you can do about it. Trying to make this happen will always lead to failure. It is so important that you understand this relationship because it will help you deal with your trading strategy more effectively.
And here the concept of “making the strategy fit your personality” comes in. Some traders prefer smaller winners but more frequent ones. Other traders don’t mind having a lower winrate but prefer to have larger winners that help them recover from drawdowns quicker. There is no right or wrong. It all comes down to your psychological makeup and what you can handle.
Wide stop-loss leads to higher winrate
In the second scenario, we just changed the stop-loss order and set it wider. Everything else is again kept the same.
What will happen now? Before you read on, ask yourself and think about it? What is the trade-off in this scenario?
With a wider stop loss, the price won’t reach the stop loss as easy. Sometimes, the price will move against your trade and get close to your stop loss. And the further away your stop loss is set, the harder it is for the price to get there.
This means that the winrate will naturally see an increase. The trade-off is that your RRR will go down because the stop distance is larger. Your winning trades will be smaller but less frequent.
Tight stop loss leads to lower winrate
In the final example, everything was kept the same but the stop loss was set closer.
By now you probably understand that a closer stop loss means that the price will have it easier to reach it. This means that the winrate will go down. The trade-off is that the RRR will increase.
The winning trades will now be larger but less frequent. Losing streaks may occur more often but it will also be easier to recover from them with a higher RRR.
What now? Consistency is the magic word
Before you now completely change your approach to trading, I have a few tips for you.
Most importantly, you want to approach this concept thoughtfully.
First of all, ask yourself if your current approach is already the perfect fit. Or did you just pick it up somewhere without any thought and just went for it? If you never spent any thoughts about RRR and winrate design, chances are that there is still room for improvement.
Most new and struggling traders would do better with a combination of low RRR and high winrate because you have more frequent winning trades. Here it is so important that you do not also try to achieve a high RRR. You need to settle for one or the other.
Once you made a decision that you want to change your approach, you must stick to it. I recommend applying the same stop loss and target rules for at least 30 to 50 trades. By then you will have a decent sample size and you can make an educated decision if this approach feels better or worse. And from there, you can go ahead and tweak it further or just stick to your new approach.