Day traders focus a lot on their win-loss rate. Their main aim is to finally reach the level where their winning trades are more than their losing trades. This indeed is a great achievement but will you always be profitable when you have more winning trades than losing trades? Continue reading to know what this may not always be possible.
If someone says that they do not follow the risk: reward rule but are profitable because most of their trades are winning trades, then they are definitely fooling you. The four winning rate is the number of trades that end up in a profit.
Not all the trades in the day will be profitable. Some may be winners and you will lose out on some trades. The win-loss ration gives you a ratio on whether most of your trades were winners or losers. A win: loss ratio of 2 is good. Anything above it is marvelous but this is only a small part of the story.
Risk: reward ratio
The risk: reward ratio is the amount of money that you are expecting to make on each trade that you take. This is calculated relative to the amount of money that you are willing to lose on each trade.
As a day trader, you will be in and out of the market at a great speed and you will look for any short-term pattern or a short-term trading signal. This means that every trade that you take will be associated with a stop loss. The stop loss is nothing but a way to manage your risk on each trade. This stop loss is the amount that you are ready to lose on each trade if the trade does not work out in your favor.
Why take the risk?
The risk that you are taking on each trade is for a profit that you are looking to make the trade. And would you like to take more risk for something where the reward is not that great? This does not hold true in real life and nor does it hold true in trading.
Every trader should take a risk less than the amount that they see can be made out of a trade. You should at no point risk more than the reward one particular trade. Only when you do this will your net account be profitable. If you follow proper risk: reward management then you just need to be right in half of the trades to have a positive account.
While it is important to balance the wins and the losses on each trade, it is also crucial that you manage the risk and reward on every trade. It is only then that your account would be profitable.