A Lesson in Consistency and Profitability Through 36 Trades: By Justin Paolini

Trading requires more emotional stability than most aspiring traders realize. One of the beliefs that aspiring traders bring with them to our Forex System Development Workshop, has to do with consistency. Most aspire to have a 60-80% win rate. “Winning” seems to be at the top of their mind.

Through 36 of our own trades, perhaps we will be able to make a point: there is a tradeoff between consistency and profitability.

Emotional Pleasure or End Result

Higher win rates are often associated with lower overall return. Our in-house trades are no exception.

In the chart below you will see 3 equity lines. They represent different potential return curves based around the same trade selection.

Source: proprietary elaboration based on 36 multi-day in-house trades taken between October 2016 and September 2017.

We are using the exact same trade parameters, and only changing the trade management to suit different objectives.

The base case scenario (burgundy line) is what retail traders typically want to hear:

  • high consistency (60% win rate)
  • limiting timing risk (not going “all-in” at the same price)
  • profit targets staggered along the way

But I’m sure that by taking a look at the chart above, you might have second thoughts about the overall benefits of these objectives. Here is what typically happens:

  • seeking for a higher win rate, naturally traders utilize profit targets and do not let the trade run as long as it could – and naturally, by scaling out along the way, total profit on the trade is reduced and losses will “outweigh” the profits.
  • when the market performs well, it does not typically look back – so by deploying only a partial stake, the momentum-driven profits are much less than they could have been.

The net effect is that the win rate is high, but the profitability is low. Another reason to remain emotionally detached from your trading results.

Be Aggressive yet Relaxed

The stronger performance demonstrated by the blue and orange lines changes the trade management as follows:

  • upon the initial signal, deploy full stake at market;
  • utilize a “lazy” trailing stop (in this case a Supertrend).

and, for the orange line,

  • take profit on 50% of the position at 1R

The results look much better overall in terms of R-gains but, as you would expect, the win rate drops to 36% for the top performer. The Orange line stops at 52% win rate. So you need to ask yourself: is this a trade-off I can handle? It’s also a test of your psyche: this business is not for the faint-hearted.

Be Consistent With Your Approach

When Sam & I talk about consistency, we do not mean high win rates. We mean being consistent with your approach. The analysis conducted above would make no sense if we had not been trading with the same approach (which is highly rule-based) time after time.

Otherwise you cannot compare apples to apples. Notice the strong similarities in the highlighted situations in UsdCad & UsdJpy (which are the locations of 3 of the trades in the sample).

No doubt that we are executing a trend-following model. Which means that we need to filter trending environments first and foremost. Otherwise, all management techniques become useless.

Over to You

It goes back to the old adage: are you attempting to be right, or are you attempting to be profitable?

Holding onto winning trades is much harder than cutting losses. It can also be frustrating to scratch a trade that was performing brilliantly, and then deflated on a news event or some sudden shock. But such are the challenges that speculators need to confront, day in & day out.

Do you have what it takes, to take 2-3-4 consecutive hits and still have the confidence to take that next trade and see it through to the end?

About the Author

Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

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