If you're good, you're right six times out of ten.

By: ShortMeTina

​Question: If you made 15 losing trades in a row, taking loss, after loss, after loss; would you be able to take trade #16 without hesitation? 

“If you’re good…”  {pause}
 
“you're right…”  {pause}
 
ONLY
 
“six times out of ten”  {pause}. 

I’ll admit; at first glance, that doesn’t come off as a true statement.  And Hardly what we would consider a stellar record and definitely not something we would associate with being a good trader. 

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​I believe this ‘truth’ escapes many aspirational traders (both old and new).  That is, many still believe it is your winning percentage that will make you money in the long run.  But the ‘truth’ is; like Peter Lynch stated; the best are right 60% of the times. 
 
And that 60% win-rate, have made him and other traders like him, billions trading the stock market. 
 
How so and why is that? 
 
Before we dive into that; let’s ask ourselves this; if ‘winning percentage’ isn’t the winning formula; then what is? 
 
But before we dive into that, let me entertain you with a quick hypothetical.  This takes into account my 3/9 (risk/reward) formula.  Read more about that here. 
 
It essentially states that; when I am wrong on a trade; I cut my losses at 3% and when I am right on a trade; I aim for 9+% before I begin to lock in profits. 

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​In our fictitious account; we will have 20 rolling trades.  We will allocate an even amount ($1,000) to EVERY trade. 
In this scenario, we also aren’t the best at picking stocks.  In fact, out of 20 trades, we were stopped out of 15 trades. 
We took a 3% loss on each of those 15 trades and locked in 9% on each of our 5 winning trades.
 
I think it’s safe to admit that getting 5 right out of 20 isn’t the best record. 
 
So you ask yourself, where is your trading account after 20 trades.  Well; let’s do the math: 

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3% of $1,000= ($30)
15 losing trades X (30)= ($450)
 
9% of $1,000= +90
5 winning trades X +90= $450.
 
After taking 20 trades, if we are wrong on 15 and right on 5 we are in fact at BREAK EVEN! ​

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Let’s take it further.  Let’s be pessimistic and say; on the 21st trade, you book a 3% loss.  You’re down $30 in your account!  Hardly anything to lose sleep about. 
 
Let’s take it a step further   Let’s be optimistic and say on the 21st trade, you booked a 9% gain.  Your portfolio is now $90 richer.  Keep in mind, this is on account of making 15 losing trades and ONLY 6 winning trades. 
 
So to a degree, Mr. Lynch is correct.  You don’t need to be right all the time to be considered ‘good’ AND I will infer, you don’t need to be right all the time to make money. ​

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If based on the above example we can conclude, ‘winning percentage’ isn’t the formula; what then is the winning formula? 
 
I am sure there are as many answers to that question as there are traders but my question to you is:  If you made 15 LOSING trades in a row (like the scenario above), taking loss after loss, after loss; would you be able to make trade #16 without hesitation?  Would you?  ​

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Good, Bad or Ugly, comment below.  

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