Why is it that newer traders often have higher win rates than experienced traders? Surely an experienced trader should be the better trader and therefore be right more often? They can indeed be if they have a strategy that doesn’t look for big gains but what we tend to find is that the more experience a trader has, the less concerned they are about being right….
You see it’s a perfectly natural emotion for a trader to want to be ‘right’ as often as possible. We are, after all raised to believe that being ‘wrong’ is bad. We spend our early life being tested at school/college/university and even once we get into the working world.
So we are pre-conditioned to want to be right as much as possible once we enter the world of trading and this hard wiring is difficult for many traders to change in their early years.
Traders with less experience naturally gravitate to strategies and methods that tend to have higher strike rates. A recent example of this was a study done by a large broker in the UK who found their clients were ‘right’ on over 60% of their trades and yet over 70% of their clients lose money. Why is that?
Because they will sacrifice the amount of profit they make on a trade in order to be right. This means they are willing to make much less on their winning trades than they lose on their losing trades. They will hold onto losses, hoping they come back into profit and the profitable trades they will close too early through fear of not banking the gain.
They end up with ‘inverted risk to reward ratios’ on their overall trading as a result. Now an inverted risk reward ratio by itself isn’t necessarily a bad thing provided the numbers stack up. For example, it’s highly unlikely that you would make money if for every £50 you risked on a trade, you only banked £1. For every one losing trade, you would need 51 winners to be profitable. That risk to reward ratio is simply too inverted to work.
But an inverted risk to reward ratio where you risked £50 to make £40 combined with an 80% win rate would still obviously be highly profitable.
However, 80% success rates aren’t easy to come by and this is where more experienced traders tend to realise they need to reach some form of middle ground between win rate and risk to reward.
Some of the world’s most successful hedge fund managers have had win rates of much less than 50%. They are more concerned with running their winning trades for the most profit they can than trying to be ‘right’ as often as possible. They don’t fear losing trades like many newer traders do and accept that they only need to be right a given amount of time in order to be profitable.
Given the stats from brokers all around the world. It would appear that lower win rates and higher risk to reward ratios should be actively sought rather than trying to find the ‘holy grail’ 90% success rate strategy as that simply doesn’t exist….