On winning every trade

On winning every trade

From childhood to college to job, my idea of winning has always looked like following :

  • School : Study the syllabus, give exams, get good marks
  • College : Crack the interviews, get a job
  • Job : Finish projects, earn a fixed monthly salary
  • Investment : Put money in Fixed deposit, get an assured return

I am sure many of you will relate to the above scenarios. If we notice, there is one thing common in all of those. That thing is certainty or assured returns. We know for certain that exam questions will come from a set of syllabus and if we do what our teacher says, we will certainly get good marks. We know with certainty how much salary we will get at the end of the month and the money will certainly be credited into our account. Similarly, we are certain about the interest coming from Fixed deposit. All this gives us a mental piece, because somehow we are in control of our future.

Strategy that works every time, or not ?

Someone who has been in the business of uncertainties or has vast experience of life can easily tell you that life is never certain. But being young and in-experienced, without having taken many risks, I have always looked for some kind of certainty in whatever pursuits I chose. Hence, when I entered the world of trading, I started my journey by looking for a holy grail strategy. 

Luckily I knew that there are no “get rich quick” schemes. So even with trading, my goal was never to find a strategy where I earn insane returns in a short period of time. I was fine with winning less, but I did not want to lose money. So my search began and I started looking for a strategy which wins almost every time. 

I observed that if I set a very small profit target and very wide stop loss, I am guaranteed to win almost all the time. Taking example of Nifty, a 10 point move in either direction from any entry point is very common for Nifty. So if I enter with a profit target of 10 points and keep a very wide SL like 100 points, I will win most of the time. Though the win rate is super good for this strategy but there is a severe flaw. Even if I win 9 out of 10 times, the 1 time I lose, I will be giving all my profits back. 

I started thinking of a strategy to bet on a particular direction, but even that worked only half the time, as being in-experienced, I had no knowledge of market direction. I moved on to non-directional option strategies like strangle or straddle. These worked most of the time, but there were times when markets turned volatile, and the trade resulted in hitting stop loss.

No matter how hard I tried, whichever instrument I chose, what strategy I deployed, I was having loss trades. What I did not realise at that time was that loss is a part of the game, and there was no escaping it. 

Winning by losing

There are moments in life, when the solution is right in front of you, but you need some external push for the bulb to light up. That external push came from elearnmarket Face2Face interview of NS Fidai Sir. He mentioned that traders look for 60%,70%,80% win rates but his trend following strategy works only 30% of the time. The key is, the profitable trades are much much more profitable than the loss making trades. The profit of one trade is enough to cover the loss of many trades. That just clicked me. I had been looking at trading all wrong. Trading is not about eliminating losses. It is about repeatedly taking many small losses in search of few big profits. Thus, my search for holy grail strategy ended. 

How many times does a strategy work ?

I started backtesting many strategies to verify if it is possible to be profitable in the long run even with a smaller win rate. In this process, I observed the following :

  • Most trend following strategies using futures or option buying had a win rate between 30% to 45%. if risk reward, position sizing, scaling in is properly done, they are profitable as well. More on this in detail in later posts. Example in this post.
  • Most option selling strategies had a win rate between 60% to 90% depending on how OTM the option is. Again, the position sizing and risk reward was critical here due to the risky nature of the instrument. Details coming in later posts. Example in this post.

Now I had verified using past data what experienced traders were claiming. A smaller win rate is fine as long as other things are taken care of. It is impossible to win every trade, even most of the trades. There is no possible strategy which does not make losses. Accepting losses was the first critical milestone in my trading journey. Though the journey has only started, now I could focus on more important things which are critical to be profitable in the long run.

Winning every trade is neither possible nor required.

This is the first post of the series “Reminiscence of a retail trader”. Read the introduction post by clicking here.

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