Published in · 2 min read · Nov 21, 2023
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The Twin Pillars of Day Trading
Consistency in day trading isn’t the result of a magic trick; it’s about dedication, practice, and understanding your performance. Relying solely on your profit and loss (PnL) to gauge your success? Think again. Dive deeper to uncover areas for growth.
Different strokes for different folks rings true, even in day trading.
Here’s a little story to shed light:
John and Steve each take a swing at 10 trades. John comes out on top for 7, pocketing $350, but stumbles on 3, setting him back by $250. After the dust settles, he’s $100 richer.
Steve, with a contrasting approach, secures wins in 3 trades, netting $350, but fumbles on the remaining 7, losing $250. Yet, he too has an extra $100 in his pocket at the day’s end.
John and Steve: two traders, two methods, one outcome.
While John needs a crash course in risk management to curb his hefty losses, Steve’s scorecard reveals he needs to up his accuracy game.
And here’s the kicker: Their trading styles can be discerned through two metrics: Win% and Risk-Reward Ratio.
A straightforward metric, Win% is the ratio of successful trades to the total trades made, ignoring those that break even.
- John’s Win% stands tall at 70%.
- Steve’s, however, lingers at a meek 30%.
By taking the average earnings per successful trade and setting it against the average loss from the unsuccessful ones, you get the Risk-Reward Ratio.
- John’s metric? A lowly 0.6.
- Steve’s? A whopping 3.2.
A curve traced by the formula y = 1/x — 1 can be a trader’s best friend, highlighting areas ripe for improvement.
Win%: Not just a number, it’s the heartbeat of your trading strategy. Representing the percentage of your victories, a high Win% sounds promising. But beware, it doesn’t spell out profitability. Massive losses can eclipse frequent, smaller gains.
Risk-Reward: This golden ratio contrasts the average profit from your wins to the losses from your missteps. A higher ratio? It’s the sweet spot where the rewards sweetly overshadow the risks.
