The most important metric in trading

Most retail
traders believe that the win rate is the most important metric in trading and
it’s usually the first thing they look at when searching for a strategy.

That has to
do with human psychology as we don’t like pain and losses, so we try to avoid
that as much as possible. Unfortunately, in trading it’s the opposite. You have
to embrace losses and keep them as small as possible.

For this
reason, the win rate is the most useless metric in trading. The majority of the
most successful traders in history have a win rate lower than 50% and some of
them like Soros for example even 30%. Nonetheless, they made history for their returns.

Remember, that you can even blow your account with a 90% win rate if you have many small
profits but very big losses.

The most
important metric is actually the RoMaD (Return over Maximum Drawdown). Your
annual returns should be at least double your maximum drawdown for that year.
The bigger the better of course.

Think about
it as a trade an investor makes on you. If you have a 5% drawdown but a 15%
return, that’s a 1 to 3 risk to reward ratio. Therefore, you should focus more
on minimising your drawdown and losses and maximise your winners.

If you
manage to keep a single digit drawdown and have average returns above the
S&P 500 in the long run, you won’t have problems finding investors.

This article was written by Giuseppe Dellamotta at www.forexlive.com.