The Secrets to Achieving a 90% Wins in Forex Trading
Use Win Rate To Improve Your Algo Trading
UPDATED January 2023
Trading in the Forex market can be incredibly lucrative when done correctly, but there are some tips and strategies that successful traders use to improve their win rate. This article will teach you step by step how to achieve a near-perfect 90% win rate in forex trading.
We all have the need to be right. Think about when you were in school - you did your best to be right, and you were graded on your efforts. You took standardized tests to measure how right you were. All your life, you have tried to pick the right career, the right spouse, the right place to live. Everyone wants to be right.
But being right doesn't matter - at least when it comes to algorithmic trading strategies. In fact, trying to be right by having high percentage trading is usually a recipe for disaster.
Trading in the Forex market can be incredibly lucrative when done correctly, but there are some tips and strategies that successful traders use to improve their win rate. This article will teach you step by step how to achieve a near-perfect 90% win rate in forex trading.
We all have the need to be right. Think about when you were in school - you did your best to be right, and you were graded on your efforts. You took standardized tests to measure how right you were. All your life, you have tried to pick the right career, the right spouse, the right place to live. Everyone wants to be right.
But being right doesn't matter - at least when it comes to algorithmic trading strategies. In fact, trying to be right by having high percentage trading is usually a recipe for disaster.
Create A Winning Algo Trading System
When evaluating trading strategies, many people first look at winning percentage (degree of "rightness"), even though there a lot of other important numbers to consider. They will, out of hand, dismiss any system below their objectives, which is typically 75% wins or higher. Worse yet, many people will try to be right by refusing to take a loss. Unfortunately, losses left open tend to get larger and larger, making the situation even worse.
Do The Math - High Probability & High Percent Trading
Why is looking at winning percentage and high percentage trading alone dangerous? Perhaps an example will help. Take 2 automated trading systems - in trading system A, 90% of the time you win $1. The other 10% of the time you lose $10. In trading system B, 10% of the time you win $10, and 90% of the time you lose $1.
Most people will select system A, since it wins 90% of the time. After all, who can handle winning only 10% of the time?
While it is true that low winning percentage trading strategies are hard to psychologically handle (it is not easy being wrong 9 times out of 10), sometimes those are better long run systems.
How do you know? A simple calculation called "expectancy" tells you. I discuss this in my trading books. Expectancy is calculated as follows:
Expectancy = ( % win * avg win $) + ( % loss * avg loss $)
% win = winning percentage, expressed as decimal
avg win $ = dollar value of average winning trade
% loss = losing percentage, expressed as decimal
avg loss $ = dollar value of average losing trade (must be less than zero)
To standardize it, many people then divide this number by the absolute value of average loss. This is commonly referred to as the "Tharp Expectancy."
You can find a simple calculator for both of these expectancies over at my Calculator page.
The important thing with expectancy is that if it is less than zero, YOU HAVE A LOSING TRADING SYSTEM. Look again at the example above. Trading system A has a negative expectancy, but system B has a positive one.
If the long term expectancy of the trading system or method you are trading is less than zero, you will eventually lose all your money - guaranteed! One example - every game in Las Vegas has a negative expectancy for the player.
So look more at expectancy, and less at winning percentage. It is no fun being right most of the time if it leads to the poorhouse.
What is a High Expectancy Trading System?
I've just showed you the simple equation to calculate the expectancy of a system. You can also go to my Calculators page to do the calculating for you!
But what is a high expectancy system, and what does it mean?
A high expectancy trading system is a strategy built on the premise that statistical probabilities dictate how individual trades will perform. Simply put, this means that an investor can use the historical performance of stocks to create a trading system and develop a reliable strategy with a high success rate. This type of investing approach is focused on consistent returns rather than risking large amounts with potentially volatile investments.
But what is a high expectancy system, and what does it mean?
A high expectancy trading system is a strategy built on the premise that statistical probabilities dictate how individual trades will perform. Simply put, this means that an investor can use the historical performance of stocks to create a trading system and develop a reliable strategy with a high success rate. This type of investing approach is focused on consistent returns rather than risking large amounts with potentially volatile investments.
Key Features of a High Expectancy System.
A high expectancy trading system includes several key features that make it an ideal choice for investors looking to increase their returns. A well-developed system should include entry and exit criteria, as well as a stop-loss point to protect your investments from sudden losses. Just realize that stop losses can protect you, but they can also hurt your performance.
Low risk trades feature prominently as part of a high expectancy system, as does proper money management techniques to ensure that you don't expose yourself to too much risk at any one time.
Finally, consistency is the name of the game when it comes to the performance of a high expectation trading system; you can use historical data and research to find stocks that have proven reliable over time.
Low risk trades feature prominently as part of a high expectancy system, as does proper money management techniques to ensure that you don't expose yourself to too much risk at any one time.
Finally, consistency is the name of the game when it comes to the performance of a high expectation trading system; you can use historical data and research to find stocks that have proven reliable over time.
Calculate Risk and Reward Ratios
The first step to achieving a 90% win rate in forex trading is to calculate your risk and reward ratios. Risk and reward ratios are used to measure the profit potential versus the downside risk of any given trade.
This requires you to look at past market performance and analyze it using the technical indicators you employ in your trading. By calculating accurate risk and reward ratios for each trade, you can minimize losses and maximize profits with precision trades.
This requires you to look at past market performance and analyze it using the technical indicators you employ in your trading. By calculating accurate risk and reward ratios for each trade, you can minimize losses and maximize profits with precision trades.
90% Win Rate Examples
Let's look at a few examples with 90% win rate. You might be surprised at the results!
Example 1: 90% win rate, $100 net for winning trades, -$100 net for losing trades.
Result: .9*100 - .1*100 = $80 expectancy (average trade) . This is a terrific strategy, and will serve you well in algo trading.
Example 2: 90% win rate, $100 net for winning trades, -$1000 net for losing trades.
Result: .9*100 - .1*1000 = -$10 expectancy (average trade) . This is a terrible strategy - you will lose money!
So, in both cases we won 90% of the trades. But in the second case, we were going for relatively small wins, with the occasional big loser. And this big loser eventually caused us losing heartache!
One important note here: All these calculations have to be completed AFTER slippage and commissions are factored in. Neglecting these values will cause you to overestimate the strategy's profitability.
Example 1: 90% win rate, $100 net for winning trades, -$100 net for losing trades.
Result: .9*100 - .1*100 = $80 expectancy (average trade) . This is a terrific strategy, and will serve you well in algo trading.
Example 2: 90% win rate, $100 net for winning trades, -$1000 net for losing trades.
Result: .9*100 - .1*1000 = -$10 expectancy (average trade) . This is a terrible strategy - you will lose money!
So, in both cases we won 90% of the trades. But in the second case, we were going for relatively small wins, with the occasional big loser. And this big loser eventually caused us losing heartache!
One important note here: All these calculations have to be completed AFTER slippage and commissions are factored in. Neglecting these values will cause you to overestimate the strategy's profitability.
How to Develop A Trading Strategy
Once you know that expectancy is the focus - not winning percentage! - it is time to get down to business. How do you actually develop a profitable strategy with long term positive expectancy?
The key is to have a proven strategy development process. I have one - I call it the Strategy Factory. It guides me through all the steps to create a solid trading strategy. You can read more about it here.
The key is to have a proven strategy development process. I have one - I call it the Strategy Factory. It guides me through all the steps to create a solid trading strategy. You can read more about it here.
Invest in Trading Education and Resources
Once you have calculated your risk and reward ratios, the next step is to invest in trading education and resources. Make sure you find reliable sources of education such as books, online classes, websites, or trading courses that provide valuable insight on forex trading.
These resources will provide you with the knowledge you need to make successful trades and reach your goal of achieving a 90% win rate.
These resources will provide you with the knowledge you need to make successful trades and reach your goal of achieving a 90% win rate.
Exercise Good Money Management Skills
Money management is a vital part of forex trading and it is important to practice this skill if you want to ensure a 90% win rate. When you are trading in the forex market, take a long-term view of your investments and always set realistic goals and targets.
Set stop losses when possible to protect yourself from large losses, and don’t be afraid to take small profits when they occur. Also, make sure you have a solid exit plan in place before entering any trade.
Set stop losses when possible to protect yourself from large losses, and don’t be afraid to take small profits when they occur. Also, make sure you have a solid exit plan in place before entering any trade.
Create A Trading Business Plan
I'd be remiss if I left out the need for a Trading Plan in your trading activities. You absolutely need one. Why? Well, if you wanted to start a business, open a store, launch a restaurant, etc. - would you do any of these without a written plan? Would you just "wing it?"
My guess is if you did, your business would not last long.
TREAT trading as a business! Create a written trading plan!!!
My guess is if you did, your business would not last long.
TREAT trading as a business! Create a written trading plan!!!
100% Returns
100% return on your money sounds outrageous, I know. But I was able to do it 3 consecutive years - verified by a 3rd party auditor!
So, it is possible. It is not easy, but it is possible. You can read more on how you can do it in this article.
So, it is possible. It is not easy, but it is possible. You can read more on how you can do it in this article.
About Author: Kevin Davey is an award winning private futures, forex and commodities trader. He has been trading for over 25 years.Three consecutive years, Kevin achieved over 100% annual returns in a real time, real money, year long trading contest, finishing in first or second place each of those years.
Kevin is the author of the highly acclaimed algorithmic trading book "Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading" (Wiley 2014). Kevin provides a wealth of trading information at his website: http://www.kjtradingsystems.com
Copyright, Kevin Davey and KJ Trading Systems. All Rights Reserved. Reprint of above article is permitted, as long as the About The Author information is included.
Kevin is the author of the highly acclaimed algorithmic trading book "Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading" (Wiley 2014). Kevin provides a wealth of trading information at his website: http://www.kjtradingsystems.com
Copyright, Kevin Davey and KJ Trading Systems. All Rights Reserved. Reprint of above article is permitted, as long as the About The Author information is included.