Question of the Week: 9/10/2008

What percentage of profitable trades must one have to be considered successful and intelligent?


The percentage of profitable trades does not determine the success of a trading year, the net profit or loss does. For example, let's suppose commission is $10 per trade and, because you hate to lose money, you employ breakeven stops on every trade as soon as possible. After 51 weeks of trading, the record shows you entered and exited 99 trades at the same price. Your total loss, after your 99th trade, would be "commission only" in the sum of $990 ($10 x 99). But, on the last week of the year, you take your 100 trade. This time, your "breakeven" stop is not hit and the market moves substantially in your favor over the next 5 days, making you $5000 on one position (from which you subtract $10 for commission). Your success rate is only 1%, but your profit for the year is $4000. Is that a successful year? Was losing $10 on 99 trades in-a-row intelligent?

If your goal is to appear "intelligent" to your friends, it shifts focus away from risk management and toward ego satiation. When your goal is to "be right" instead of "making a profit," your bank account will usually suffer before your ego is satisfied and before your friends are impressed. You need to ask yourself "are you involved in the markets to look intelligent to your friends, or is your focus making money"? Paradoxically, for most trades to be successful, the majority of your friends must think you are crazy (not intelligent) when the trade is initiated. Being on the side of the minority is an essential element in the success of most trades, so the "intelligent" part only occurs when the trade is over and you've made a nice profit.

It is my experience that most people follow and trade markets to impress their friends and family, or to have something to do and talk about, more than to make money. Until trading becomes solely about making money (not about being right and not about excitement or staying busy), your bottom-line will suffer.

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