Updated: Dec 5, 2020
A few months ago, I started teaching positional Breakout Trading to a small group of traders (consisting of both men & women) having different full-time jobs. Still, one thing in common was their passion for trading.
I had asked for two commitments from all of them:
They will be learning and committed towards this course for 2-years
They are not supposed to try any other trading method especially intraday trading
As most of you know, there are three major trading types in the market:
Trend Reversal, and
I had chosen Breakout Trading, as it works well in most market conditions, except downtrend.
I had designed my course for small retail traders who have less capital.
Hence they are supposed to take only "Long" trades in the cash market as per the setup.
It's because we can't carry positional short trade in the cash market in India, and taking trades in the future or options don't fit under the money management rule.
This course was initiated before the pandemic. Everyone completed the initial learning and assignments. They started taking trades, and they were in the right direction.
Unfortunately, the COVID-19 issue started, and markets began falling. Nifty (Indian NSE Index) has corrected around 40%. This fall also had an impact on their trading.
After 2-months of the COVID-19 incident, we had set up a Zoom meeting to discuss the completed 25 trades (this is part of the course).
When I saw those 25 trades, 50% of the trades ended with breakeven or a small loss (as we have a quick trail SL plan), 40% are winning trades, and the remaining 10% took the original stop-loss.
During the discussion, I had observed none of them had taken a big hit on their portfolio (all were in the -3% to +2% range on their portfolio). Hence we discussed the trades, and I encouraged them to continue with the same plan. Because sticking to one trading system throughout different market conditions is an absolute necessity to become a successful trader.
Unfortunately, the COVID-19 impact continued in the market. Nifty showed major volatile moves for many more weeks. One day it showed a big gap up open, and the next day it showed a big gap down. In this situation, the time has come to discuss another 25 trades.
When I started the meeting, I had sensed that the energy level of the group is down. Being a pranic healer, I can easily sense a person's energy levels, and sometimes this helped me find a proper solution.
Thus, instead of discussing 25 trades, I decided to look at the losses and thought to talk about the importance of focus and persistence effort. When I looked at their 25 trades, around 68% of the trades ended with breakeven or small loss, and the remaining 32% are the winning trades.
It means our Breakout Trading system showed only 32% accuracy. Many retail traders run behind 90% accuracy systems. However, what they tend to forget is along with 'Accuracy,' 'Risk-Reward' is also essential.
Let me explain this in detail.
Assume a trader risks 1000 for each trade.
System-1: Accuracy 80% and Risk-Reward is 1:1
In this case, for every winning trade, he gets ₹1000, and for every losing trade, he will lose ₹1000 (as risk-reward is 1:1).
After 10 trades -
Profit = ₹1000 x 8 = ₹8000
Loss = ₹1000x 2 = ₹2000
Hence, the total profit is ₹6000.
System-2: Accuracy 60% and Risk-Reward is 1:1.5
In this case, for every winning trade, he gets ₹1500, and for every losing trade, he will lose ₹1000 (as risk-reward is 1:1.5).
After 10 trades -
Profit = ₹1500 x 6 = ₹9000
Loss = ₹1000x 4 = ₹4000
Hence, the total profit is ₹5000.
System-3: Accuracy 40% and Risk-Reward is 1:2
In this case, for every winning trade, he gets ₹2000, and for every losing trade, he will lose ₹1000 (as risk-reward is 1:2).
After 10 trades -
Profit = ₹2000 x 4 = ₹8000
Loss = ₹1000x 6 = ₹6000
Hence, the total profit is ₹2000.
I hope now you got an idea of how both "Accuracy" and "Risk-Reward" plays a crucial role in trading.
Coming back to our original story, my students have received only 32% accuracy.
Does it mean their accounts have taken a hit?
I asked them to check.