Over-reliance on accuracy in trading can be dangerous!

Accuracy would seem to be a good thing.

In many professions, it is the most important thing.

(see picture at left)

However, in trading, over-reliance on accuracy can actually be destructive.

A new mentoring trader started with me last week and he showed me a strategy he had learned that generated 80% winning trades.

80% winning trades – that seems too good to be true.

Could there be a catch?

As we discussed the strategy in greater detail, he showed me the setups which seemed very reasonable – in fact the setups were quite clever.

But, then, he told me about the risk/reward of the trade and I realized that this could never work in the long run.

The way the strategy attained 8 out of 10 winners was that it employed a 4 tick target and a 12 tick stop loss.

In other words, the strategy would never give more than a 4 tick winner, but was willing to stand a 12 tick loss.

That is exactly the opposite of what I know works in the long run.

But, the problem with this strategy is not just the backwards risk/reward ratio.

The problem is that even though the strategy gives a lot of small winning trades, it will never generate meaningful profits and, importantly,  it does not have enough of an edge to overcome anything that goes wrong.

The new trader thought that his inability to make money using the strategy was because he was not sufficiently disciplined or skillful.

In fact, the problem was not him. It was with the strategy which relies on paying him small amounts when he is right and taking away large amounts when he is wrong.

Successful trading comes from putting the probabilities in your favor, not from being right all the time.

The best strategies are the ones that exploit the market when they are being rewarded and lose as little as possible when they are not working.   Successful strategies take advantage of the power of unequal profits and losses where profits end up being dramatically larger than losses.

Also, a strategy with only a fixed target, in this case a small one, assures that you never participate in the big moves.

You are just taking the chump change and letting the big moves happen without you.

I show traders in my Professional Trader Mentoring Program and my Express Program an exit strategy that leaves open the possibility of big winners because the market will sometimes deliver profits beyond your expectation if you are set up to receive them.

After all, if you are only asking for 4 ticks, the market will never give you anything more than that. However, if a portion of your exit strategy leaves open the possibility of opened-ended wins, then you are likely to have winners that pay for a lot of small losers not the reverse.

Don’t get me wrong, I understand the appeal of lots of winners.

When I go to the race track, I bet on the horses to show so that I can cash in lots of tickets. I think it is fun to turn my ticket in at the window for my winnings.

However, I am not confused in thinking that this cashing in of tickets is making me any money.

In trading, real money comes to those traders who put the odds in their favor and have winners that are dramatically larger than their losers.

Accuracy is not a bad thing.  It just isn’t the only thing that matters in trading.

Wishing you success in your trading,

Copyright © 2011, all rights reserved

Print This Post Print This Post

Feedback from the above:

As far as the 80/20 trader goes, one doesn’t need to even look at it from a trading perspective or methodology when a simple business plan break-even analysis shows its flaws.

If he’s trading the ES, then he’d net around $3,600.00 profit from the 4 tick winners if round turn commissions are 5 bucks. And he’d lose about $3,100.00 on the 12 tick losers using the same commission rate for a pre-tax profit of $500.00. Set aside 20% for the Feds and 5% for the State of Illinois and you’re left with $375.00.

That’s enough to cover some of the fixed costs associated with running a small trading business but it won’t cover them all.

And you want to talk about risk/reward? The ES is trading in the 1330/40 range today so the notional value is over 66 grand. 100 trades in this price area is well over 6 million dollars risked for a profit of only $375.00? That doesn’t sound too appealing to me.

I’m glad he found you so you can set him straight.”   Geoff G., Lombard

As my pal Andre said today,

The journey through accuracy is an expensive one!

Comments are closed.

About the author

Jeff Quinto has been called "America's Preeminent Futures Trading Mentor". Jeff is a 40-year veteran futures trader, former CME member and a world-class trading coach. He has coached hundreds of futures traders, including traders from Hong Kong, France, China, England, Australia, the US and Canada.

Jeff strongly believes that professional traders are world-class competitors, comparable to professional golfers, top tennis players, and Olympic athletes. None of these competitors could have achieved their top-ranked status without first having a world-class coach.

Jeff is that world-class coach for futures traders.

Free E-mail Newsletter Sign-up
Email:  
For Email Marketing you can trust

I am the first to be surprised by this outcome: I am doing something I could only dream of just five months ago. Andrea Cullati, Milan, Italy



"Your mentoring is the best antidote for unsuccessful trading and I plan to succeed so best take full advantage. Never had that kind of support from those other so-called trainers." AB



I just completed Jeff's program and without a doubt, Jeff has set me on the path to success. What he taught me in three months would have taken me years to learn. Mark, CPA CFA



“Jeff, your enthusiasm is contagious. I have never had more fun trading until now. Mentoring with you was a fantastic experience” Gregor Cotman, Slovenia



“Jeff, you are the perfect trading coach with your years of trading experience, your years of coaching traders, and your years of being a great person to talk with.” Rob Wilkes



“His style is completely professional, so the critiques of my trading development are completely objective and I believe that’s why I’m evolving as a successful trader.” Rob Rogers, Chicago



“Jeff, as a mentor I’ve found you to be outstanding. You believe in people and strive to create successful traders… Thanks for your mentorship” Robert Eggleston



"Thank you for a truly valuable program" Barry N. Crockett
Log In
Resources & Friends







Click here to get a free demo of Ninja Trader
You can get a free demo of Ninja Trader by clicking here

Click here to go to TraderKingdom.com To go to TraderKingdom.com click here



A word about risk
Trading futures contracts may not be suitable for all investors. You may lose a substantial amount of money in a very short period of time. The amount you may lose is potentially unlimited and can exceed the amount you originally deposit with your broker. This is because trading is highly leveraged, with a relatively small amount of money used to establish a position in assets having a much greater value. If you are uncomfortable with this level of risk, you should not trade these contracts.
For a more detailed explanation of the risk from futures and options trading click here.
The author or any personnel associated with aforementioned makes no warranties of any kind, expressed, implied or statutory concerning the data or information provided on the following Web Pages. The opinions expressed in these webpages are the opinions of the author and do not necesssarily represent the opinions of any other entity.
Copyright © 2006 - 2018 by Jeff Quinto All Rights Reserved
JeffQuinto.com, Electronic Futures Trader and ProfessionalFuturesMentoring.com are educational in nature and do not provide brokerage services or make investment recommendations. Professional Trader Mentoring Program, Professional Trader Masters Program and ProfessionalTraderMentoring.com are trademarks of Jeff Quinto dba Electronic Futures Trader