No need a 100% success ratio to make profits in Market

To begin with (for those who are new), let's spend some time in understanding as to what is a “Success Ratio” in trading. The success ratio is nothing but the number of winning trades out of the total trades taken.

For example - If a trader takes a total of 10 trades, books profit in 7 trades and book loss in 3 trades, his Success Ratio is 70%. As he has 7 winners out of 10. Or suppose a trader takes 100 trades in one year. He books profit in 65 trades and books losses in 35 trades. Then his success ratio is 65%.

Now since we know, what the success ratio is, let's move on to understand why am I saying that you don't need a 100% success ratio. Let me put this statement this way - you don't necessarily need beyond 65% success ratio to make money in markets.

However, on the contrary, most traders/investors in stock markets are obsessed with high success ratio. They feel Analysts and Researchers have methods to precisely predict the stock future movement. This is why many advisors and tip providers try to take an advantage out of this situation. Most of them claim that they have more than a 90-95% success ratio. I am not saying that the research is not required. However, giving undue importance to research and ignoring some other important aspects of trading can be a blunder.

You have to finally break your belief and trust that Risk Management and Money Management are the most important aspects of making money in trading. If I have to weight Research against Money and Risk Management in trading - I would give the weight of 60 out of 100 to Risk and Money Management. I would give a weight of only 40 out of 100 to research.

Look at how a simple Risk Management Technique can benefit traders -
The technique is called as Risk-Reward Ratio. (Stoploss to Target Ratio)

Here is an example of a trade -
Stock A recommended being bought at Rs. 210 which has a stop loss of 190 and a target of 260.

Risk = Entry-Stoploss = 210-190 = -20
Reward= Target - Entry= 260-210= +50

So the Risk-Reward Ratio in the case of Stock A is RR Ratio= Risk/Ratio= 20/50 or 1:2.5.
This means that trading in stock A has a risk of Rs 1 for Reward of every Rs 2.5.

Here is Why I am saying that you don't need a 100% success ratio to make profits in the market.

Say, a trader takes 10 trades during a specific period of one month. Here are 3 different scenarios with different Winning Ratio and same Risk-Reward Ratio.

Scenario 1- 
Winning Trades- 7
Losing Trades- 3

This means the Winning Ratio is 70%

Let's assume all the trades have RR Ratio of 1:2.5. It means each trade profit's Rs 2.5 in each winning trade and loses Rs 1 in losing the trade.

So Reward (Profit) = 7 (winning trades) * Rs 2.5 (profit in each trade) = Rs 17.5 (This is profit ignoring transaction charges)
Risk (Loss) =  3 (loosing trades) * Rs 1 (loss in each trade)= Rs 3 (This is loss ignoring transaction charges)

Total Profit = 17.5-3 = Rs. 14.5

Scenario 2- 
Winning Trades- 5
Losing Trades- 5

This means the Winning Ratio is just 50%

Let's assume all the trades have RR Ratio of 1:2.5. It means each trade profit's Rs 2.5 in each winning trade and loses Rs 1 in losing the trade.

So Reward (Profit) = 5 (winning trades) * Rs 2.5 (profit in each trade) = Rs 12.5 (This is profit - ignoring transaction charges)
Risk (Loss) =  5 (loosing trades) * Rs 1 (loss in each trade)= Rs 5 (This is loss ignoring transaction charges)

Total Profit = 12.5-5 = Rs. 7.5
It means you can make profits even if you have 50% profitable trades.

Scenario 3- 
Winning Trades- 3
Losing Trades- 7
( I am sure even with little analysis one can achieve this)

This means the Winning Ratio is just 30% and the trader is losing out on 70% of the trades.

Let'sassume all the trades have RR Ratio of 1:2.5. It means each trade profit's Rs 2.5 in each winning trade and loses Rs 1 in losing the trade.

So Reward (Profit) = 3 (winning trades) * Rs 2.5 (profit in each trade) = Rs 7.5 (This is profit - ignoring transaction charges)
Risk (Loss) =  7 (loosing trades) * Rs 1 (loss in each trade)= Rs 7 (This is loss ignoring transaction charges)

Total Profit = 7.5-7 = Rs. 0.50

Wow, that's the news. Even a poor fellow with 30% winning trades (Success Ratio) is making a profit.

And this is what it is.

You don't need 100% winning trades to make profits in the market. You need proper Risk Management along with proper Money Management.

In my Trading Plan, the focus is on Risk and Money Management.
 

Website: www.money4me.in

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Disclaimer: The contents produced here are purely for educational purpose. They should not be construed as buy/sell recommendations. I am not a SEBI registered Analyst or Investment Advisor. Readers are advised to consult their Investment advisor before taking any decisions based on the above write-up.