Insight Into Trading - What Percentage Of Your Trades Are
Winners?
An Inquiry into Trading Systems, Money Management and the Human
Psyche At a recent seminar, I got involved in an interesting
discussion with other attendees centered on trading success.
More specifically, the percentage of successful trades and the
percent of accuracy you should realistically expect from trading.
For whatever reason, our minds tend to focus on accuracy as the
primary way of evaluating a speculative endeavor. True to form,
accuracy - our mental magnet of making money - has very little
to do with finding success.
Reality - No Great Expectations By and large, the record of the
past teaches us that on balance, the investment newsletter
writers (commodity, stock or mutual funds) don't do such a hot
job. As a result, taking a quick peak at the advisors'
percentage of accuracy in picking winning trades should prove to
be at the very least - interesting.
In looking into this I primarily focused on: Of the small
percentage of winning services, what was the accuracy percentage
of these most profitable advisory services?
I arbitrarily selected the March 1993, January 1996, March 1997,
May 1998 and June 1999. What follows are the figures for the
most profitable advisors / service for that month and their
percent of accuracy of all trades for the prior 12 months.
Mar 1993 Commodity Timing . . . $60,939 . . . 51% Jan 1996 Moore
Research . . . . $84,643 . . . 52% Mar 1997 Turtle Talk. . . . .
. $79,244 . . . 42% May 1998 Commodity Timing . . . $90,430 . .
. 47% Jun 1999 Moore Research . . . . $102,605. . . 54%
A key point to remember is that these results are the "best of
the best" for the above time periods. On average these services
were right 49.2% of the time - our first indication that
accuracy percentage doesn't necessarily have much to do with
making money.
Consistent Winners During the selected timeframe there were four
advisors / services that substantially outperformed the others.
In other words - they made money. Before we look at their
figures, let me point out that none of the top four performers
base their approach on the "magical and mystical" stuff like
Gann, Elliot, Astrology and the like. In fact, advisor letters
touting those methods have the worst performance. The winning
letters are, by and large, trend followers to one degree or
another.
With that in mind, here are the ones that I feel had the best
performance. The market letters that had the most consistent and
profitable performance and their percentage of winning trades.
The dollar figures represent the money they made from their
recommendations for the prior 12 months from each of the
reporting dates listed above.
Top 4 Newsletters . . . . . . . . 5 Year Total Profits . . . %
of Winners Commodity Research Bureau . . . . . $158,840 . . . .
. . . . 48% Commodity Timing. . . . . . . . . . $224,239 . . . .
. . . . 47% Commodity Trend Service . . . . . . $214,858 . . . .
. . . . 32% Moore Research. . . . . . . . . . . $242,253 . . . .
. . . . 51%
Clearly, the winners are not particularly accurate - just very
profitable!
Now the question begs - What allows them to make money with what
would appear on the surface as mediocre accuracy? The answer
lies in one of the oldest adages on the street... let your
profits run and cut your losses short. In terms of math, this
simply means that their average profit per trade is
substantially greater than their average loss.
The message should be clear and is one based on how real people
did in real time and in real world trading - accuracy really
doesn't matter all that much. On a side note, the next time
someone tells you that all newsletters are a bunch of hot air
you may want to show them the figures above.
Of course, the counterpart is that you must not take quick
little profits. To succeed in this business you've got to hold
on for large winning trades because as you can see by these real
world examples - accuracy doesn't make you money.
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