Why a trading win/loss ratio is the WRONG figure to focus on (and 253 reasons why you shouldn’t)

Ok let’s start with the bottom line number. Since it’s inception 8 months ago the transparent Hawkeye directional options portfolio has produced a return on investment of 253%.

ROI v SPY

55 trades have been entered during this period and turned a $10K figure into $35,300 (see below for individual trade results).

55trades

I guess you are looking for the next figure suggesting a substantially favourable win/loss ratio and chomping at the bit to discover the magic entry indicators that created such a return…a list of great result after great result.

Here are three things I want to put out there for now:

  1. It does not matter what vehicle you are trading this IS so relevant.
  2. The win/loss ratio has been 1:1 – see above ! (yes I was surprised too when I did some in depth formal analysis – another topic for a blog post for another day)
  3. Many people would assume that a great result only relates to a positive i.e. profitable result. The reality of course is much different as any experienced trader will testify. A great result is one that results from great decisions, a consistency in action and this may be positive or negative in dollar outcome.

That old market cliche of keep your losses small and let your profits run is well known and one that millions pay lip service to and yet is rarely embedded in the mindset and behavior of traders and hence is not implemented in practice.

So here it is, the evidence…

Firstly, let’s look at the performance on a two weekly basis. So three losing fortnights out of the 16. What is important (and I am sure you clocked this from the previous chart..look at the extent of the wins versus the extent of the losses).

2weekpercent

The key ratio that HAS made the difference is average draw-down when a trade which went against that which was desired versus the profitable trades.

Comparing the average trade draw-down against the average win is the far more important ratio. It fits with that previously stated cliche that few really ‘believe”, it fits with the idea that entry serves purpose ONLY to give yourself the chance of a higher probability trade and it is appropriate exits that are the key to sustainable success, simple!

Every trading book on the planet that is worth reading discusses keeping losses small, money management (position sizing) that optimize this concept and the importance of allowing profits to mature.

So if our responsibility at Hawkeye Options is to demonstrate through the trade-alert/portfolio service the process through which you can increase your chances of good results would you expect to see anything that is not congruent with these key guiding principles.

So quite simply (and for those of you who are not used to the leverage associated with options and so the bigger numbers plus or minus just remove the zero at the end), here is how it is done…

Average individual trade draw-down when a dollar loss = 22%

Average individual trade gain when a dollar profit = 65%

So in other words a 2.91:1 gain/loss ratio or reward/risk if that terminology helps reinforce the concept.

So warts and all..even with a win/loss ratio of 1:1 that is how you can make significant sustainable gains. So in dollar terms, here is the bottom line per fortnight

2weekdollar

 

As an educator and coach it would be amiss of me not to ask the question…what yours bottom line? Do you know, have you ever looked at it, or are your focused on a ratio that is a of far lesser importance in the type of trading that many of you engage with  (this includes FX, FCD, Eminis etc )

With this the focus for your decision making and system development you run the risk of missing the point, missing out on sustainable profit.

The majority of traders unfortunately will continue to search for the holy grail of trading solely in entry indicators, will remain win/loss ratio oriented and will skip from strategy to strategy trying to find it, when an investment of a little time would give them the answer that may be the springboard to take them closer to the results they desire. Please make it your mission.

Surely it is worthwhile to work out your numbers now, not next week, month or end of the year.

Two things to finish:

  1. There is always the invitation to come to have a closer look at what we do at www.hawkeyeoptions.com   and we are having an open webinar to explain how we operate to which you are invited at https://www2.gotomeeting.com/register/337152346 to register.
  2. There are ways to make your win/loss ratio sensational which is strategy specific ..drop us a line or wait for the blog post next week to see what this is (on last count 18 out of 19 winning trades though significantly less return per trade)

trade safe

 

Mike Smith

www.hawkeyeoptions.com

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