Updated: Nov 29, 2020
Because of this reason, 90% of traders fail in the stock market trading
I have read many messages in Whatsapp groups and Telegram channels about 90% accuracy in trading.
I am sure many of you read similar messages if you are still thinking about how do I start trading.
But there is a problem:
If you don't look at "Risk-Reward," you aren't going to make money in trading even with 90% accuracy.
In fact, a trader should consider both "Accuracy" and "Risk-Reward" to get a successful career in trading.
Let me explain in detail.
What is Trading Accuracy?
Trading Accuracy or Winning Rate is nothing but a percentage of winning after a series of trades (typically for a minimum of 100 trades).
Accuracy = (Number of winners/Number of losers) X 100%
What is the Risk-Reward Ratio?
Risk-Reward is the ratio of the money you will lose if a trade hit your stop-loss to the profit if a winning trade is closed at a predetermined target level.
Risk-Reward Ratio = Loss/Win or Loss : Win
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.
Do you think it is possible to find a Trading System with 90% Accuracy?
It's definitely possible, compensating with "Risk-Reward."
For example, Nifty current market price (CMP) is 11000. I can give a call to buy at 11000, Target 11010, and stop-loss at 10900.
In this way, anyone gets 90% accuracy. But have you noticed the Risk-Reward?
We are risking 100 points to get 10 points profit.
Do you think it's a wise move? I will leave the decision to you!
A successful trader will have only 50-60% accuracy, but their risk-reward will be over 1:2. In this way, they make money in the long run.
Accuracy vs. Risk-Reward – Final Words
The difference between "a good trade" and "good trading" is a lot of money.
Now have you understood the dirty secret of 90% accuracy traders?
Most people read or watch a trading concept, and they start taking trades directly. They ignore other aspects in trading - Money Management, Emotional Control behavior, and Discipline, which play a crucial role in becoming successful in trading.
Trading is a long career. It is better to have complete clarity on both 'accuracy' and 'risk-reward' to stay in this game.
Don't chase 90% accuracy trading systems. You can finalize a trading system by looking at both accuracy and risk-reward ratio.
What are your accuracy rate and risk-reward ratio in your trading?
Do you have any questions or comments? You can drop me a line in the comment section. I am happy to help.