Day traders cannot avoid losses. If anyone tries to sell you a system that has no losses, or even as little as 10% losses, you can be sure that they are unreliable. The fact is that traders engage in a very risky endeavor, and, even with the best plans, the markets will do unpredictable things.
One point to be careful of when researching strategies is the idea of a “winning percentage.” Many day trading programs will tell you that they have a winning percentage of over 90%. This sounds wonderful, of course, but what does it really mean? Does it mean that they profit from 90% of their trades? Does it mean that they always profit with an additional 90% of what they put in? By itself, this statistic tells you nothing.
You can get away with making your winning percentage sound better than it really is. In day trading, your “winning percentage” is a function of the ratio between your stop loss and your profit target. If you increase your stop loss and decrease your profit target, your winning percentage will go up.
Unethical advertisers will make their winning percentage seem better by using the following trick of statistics. An average trader may set a stop loss of $200 and a profit target of $300, which would give them a winning percentage of around 60%. But if you increase the stop loss to $2,000 and decrease the profit target to $100, the winning percentage might climb up to 90%.
This increase in winning percentage does not actually mean that the system is more profitable. While the winning percentage increases, the average profit per trade decreases. Therefore, most of the profits on this example would likely be eaten up by commissions, actually resulting in less real gain than the lower winning percentage.
Most reasonable day traders look for winning percentages between 60% and 80%. But the important thing is that they look at this statistic alongside others. You also want a profit factor of around 1.3-2.5 and a maximum drawdown of 10-20% of the yearly profit. With these other numbers mixed in, you can be sure that the decent sounding winning percentage actually translates into real profits once all the numbers have been crunched and commissions paid.
You should also be aware that different types of systems usually show different winning percentages, although, from this information alone, you will not know how profitable they can be. Most trend-following systems have a winning percentage of 55%-65% while trend-fading systems typically have a winning percentage of 65%-80%. But some trend-following systems can actually be more profitable than trend-fading systems that have higher winning percentages.
As the saying goes, the devil is in the details. Beware of looking at one statistic alone when researching trading strategies. Be sure you understand all aspects of a plan before putting it into practice, not just the most dramatic numbers. It may turn out that the right mix of modest sounding numbers is actually vastly more profitable than the one with the shining, blinking “90% Winning Percentage” stamped on the front.
As we all know, if it sounds too good to be true, it probably is. Statistics can be manipulated in a number of ways, and you should understand exactly what they mean before committing to a program.