This week’s question comes from Mark, who asks:
How can I achieve a high enough win rate to become profitable with Forex?
Winning seems to be the key ingredient in just about any endeavor we take on in life.
Want to become a successful athlete? You have to win.
How about climbing your way up the corporate ladder? You have to win to achieve that too, in a manner of speaking.
Everywhere you look, a successful life seems to be about winning more times than you lose.
So when it comes to Forex trading, naturally everyone wants a high win rate. Just look at how the developers of Forex trading robots advertise ridiculously high win rates to sell their product.
They know there’s a burning desire among traders to achieve a high winning percentage and they exploit it.
But is that desire well founded or misplaced?
In this post we’re going to discuss what kind of win rate you need to become consistently profitable. We’ll also dig into some of the key factors that play a role in developing a trading edge.
Unless you know me, my answers to these questions might surprise you.
Ready to get started? Let’s do this.
What Is a 'Profitable' Win Rate?
I get asked this question quite often. It seems many traders want to know the win rate required to achieve consistent profits.
But here’s the thing…
This question has no legitimate answer. Sure, I could make something up and tell you that you need a win rate above 50% to be profitable— but that simply isn’t true. In fact, it’s dead wrong.
In the world of Forex, win rates generally go hand in hand with a trading edge. Most traders believe that if you lose more times than you win, then you have no edge as a trader.
Well, that’s wrong too.
You see, a trading edge is much more than the ability to win. It includes everything from discipline to time frames to your risk to reward ratio. It even involves the currency pairs you trade and how you allocate your capital on each position.
If you do it right, all of those things come together to form an edge that puts the odds in your favor. As you’re about to see though, putting the odds in your favor doesn’t necessarily mean winning more times than you lose.
It means having the ability to make more money than you lose over a series of trades. Those are two very different things.
So what is a profitable win rate?
There isn’t one. A better question is what other factors do you bring to the table that stack the odds in your favor?
- Do you use a favorable risk to reward ratio?
- What times frames do you utilize?
- Are you pyramiding into profitable positions?
The answers to those questions play a critical role and also come together to form the foundation of your trading edge.
Busting a Myth About Your Trading Edge
Everyone wants to win. Whether you’re trading or playing your favorite sport, winning is the goal.
Unfortunately, too many traders get caught up in this idea of a high win rate. To be honest, it’s not just controversial, it’s nearly always a waste of time. You see, you can lose more times than you win and still have an effective trading edge.
Note that I said more times and not more money.
A trading edge is more than just a way for you to achieve a winning percentage above 50%. In fact, if your only measure of whether or not you have an edge is your win rate, you’re missing the big picture!
I’ve had many months where I lose more times than I win. But in those months where I used techniques such as favorable risk to reward ratios and pyramiding, I still came out ahead.
Let’s take a moment to discuss both of these strategies now.
A Favorable Risk to Reward
Your risk to reward ratio can single-handedly bail you out of a losing month. For instance, let’s say you took ten trades last month. Out of those ten trades you lost money on six of them so your win rate was just 40%.
This is where most traders get it wrong. They look at that 40% and say, “you don’t have a trading edge because your losing trades outweigh your winning ones”.
Your edge as a Forex trader is a combination of factors. It’s never just about how many times you win and lose. That’s an overly simplistic view, and in my opinion, it’s also a misdirected one.
Going back to our example for a moment, if you had lost on 60% of the trades you took last month but employed a 2R minimum, you would still have come out ahead.
Here’s how that would look:
We could make the argument that not every winner will achieve the desired 2R, but you’ll also have trades that exceed the 2R minimum.
No matter how you look at it, a favorable risk to reward ratio is a powerful addition to any trading edge.
Turning a 2R Into a 4R Without the Risk
Pyramiding is a simple technique that accounts for the majority of my profits in a given month. Just like having a favorable risk to reward, if you aren’t pyramiding you’re missing out big time!
I’m not going to go into a ton of detail here as I wrote a lesson on pyramiding. However, the idea is to strategically add to a position as it moves in your favor.
The key word there is “strategically”. You don’t want to blindly add to a profitable position whenever the urge strikes you.
Instead, you want to wait for a close above or below a key level before considering whether or not to add to a position.
Pyramiding alone can turn what would have been a 2R profit into a 4R profit or more; it’s that powerful.
At the end of the day, a true edge in the Forex market means putting the odds in your favor. Those odds are not about winning more times than you lose, they’re about making more money than you lose over a series of trades, and there are many ways to accomplish that outside of a high win rate.
An edge is a combination of factors, and your win rate — whatever it might be — is just one of many.
So there you have it – you don’t need to win 90% of the time to come out ahead. You don’t even need to win more than 50% of the time to make consistent profits.
Your trading edge is much more than that. In fact, your win to loss ratio is just one piece of the puzzle. Other things like how often you trade, the time frames you utilize and the risk to reward ratio you employ are all key factors that determine your level of profitability.
Many Forex traders get caught up in the idea that consistent profits are synonymous with constantly winning. Perhaps it’s an ego thing or maybe it’s something less obvious. Then again, this industry is made up of 90% men, so ego might be a good guess.
Either way, you don’t have to win all of the time, or even the majority of the time, in order to achieve consistent profits. That’s what the Forex trading robot salesman would have you believe, but don’t fall for it.
As George Soros famously said, “It’s not whether you’re right or wrong that’s important, it’s how much money you make when you’re right and how much you lose when you’re wrong”.
In other words, things like your risk to reward ratio and whether or not you pyramid into profitable positions are also cornerstones of an effective trading edge.
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
- Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.