Accuracy would seem to be a good thing.

In many professions, it is the most important thing.

(see picture at left)

However, in trading, over-reliance on accuracy can actually be destructive.

A new mentoring trader started with me this week and he showed me a strategy he had learned that generated 80% winning trades.

80% winning trades – that seems too good to be true.

Could there be a catch?

As we discussed the strategy in greater detail, he showed me the setups which seemed very reasonable – in fact the setups were quite clever.

But, then, he told me about the risk/reward of the trade and I realized that this could never work in the long run.

The way the strategy attained 8 out of 10 winners was that it employed a 4 tick target and a 12 tick stop loss.

In other words, the strategy would never give more than a 4 tick winner, but was willing to stand a 12 tick loss.

That is exactly the opposite of what I know works in the long run.

But, the problem with this strategy is not just the backwards risk/reward ratio.

The problem is that even though the strategy gives a lot of small winning trades, it will never generate meaningful profits and, importantly,  it does not have enough of an edge to overcome anything that goes wrong.

The new trader thinks that his inability to make money using the strategy must be because he is not sufficiently disciplined or skillful.

In fact, the problem is not him. It is the strategy which relies on paying him small amounts when he is right and taking away large amounts when he is wrong.

Successful trading comes from putting the probabilities in your favor, not from being right all the time.

The best strategies are the ones that exploit the market when they are being rewarded and lose as little as possible when they are not working.   Successful strategies take advantage of the power of unequal profits and losses where profits end up being dramatically larger than losses.

Also, a strategy with only a fixed target, in this case a small one, assures that you never participate in the big moves.

You are just taking the chump change and letting the big moves happen without you.

I show traders in my Professional Trader Mentoring Program an exit strategy that leaves open the possibility of big winners because the market will sometimes deliver profits beyond your expectation if you are set up to receive them.

After all, if you are only asking for 4 ticks, the market will never give you anything more than that. However, if a portion of your exit strategy leaves open the possibility of opened-ended wins, then you are going to have winners that pay for a lot of small losers not the reverse.

Don’t get me wrong, I understand the appeal of lots of winners.

When I go to the race track, I bet on the horses to show so that I can cash in lots of tickets. I think it is fun to turn my ticket in at the window for my winnings.

However, I am not confused in thinking that this cashing in of tickets is making me any money.

In trading, real money comes to those traders who put the odds in their favor and have winners that are dramatically larger than their losers.

Accuracy is not a bad thing. It just isn’t the only thing that matters in trading.

Wishing you success in your trading,

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