# A Mathematical Approach to Eliminating Emotions

Additional resource that further elaborate importance of Positive Expectancy and Opportunities: A Mathematical Approach to Eliminating Emotions.

Most traders spend countless hours looking for that magical combination of indicators that will reveal the “holy grail” of trading strategies. Obviously, the goal is to find a winning strategy, but more oftentimes than not “winning” is misconstrued into trying to find a strategy that wins a high percentage of trades. After all, winning a trade means making money, and losing a trade means losing money, right? Don’t be so sure about that.

Like many of the seemingly obvious components that go into creating a great trading plan and becoming a great trader, what we think seems logical in reality is what is holding us back.

For those of you whom have been following us here on FX360 this may not be the first time you’ve read something similar to this, and it won’t be the last. Along with other ways to think in terms of probabilities, the following is an example of something I deeply believe needs to be not just simply understood, but ingrained into the subconscious of our trading psyche (if through nothing more than repetition) in order to ultimately eliminate emotions for every single trade we place. This may perhaps be the most difficult aspect of becoming a true professional trader, but a trait that one simply must have to stand any chance of survival—both financially, and psychologically.

Being a profitable trader is not just about winning percentages. In other words, you can earn positive returns without winning most, or even a majority, of your trades! It’s all about risk vs. reward. If your strategy allows you to identify trading opportunities that offer more reward than risk, then even a 50% winning ratio could yield a significantly positive return over time.

For example, let’s assume a \$10,000 trading account where 10 trades are placed, and \$100 (1%) is put at risk for each trade…

If risk-to-reward is 1-to-1, then a 50% win ratio will result in a “break-even” return…

[10 trades placed] x [50% losers] = [5 losses] x [\$100] = [\$500 loss]

[10 trades placed] x [50% winners] = [5 wins] x [\$100] = [\$500 profit]

[\$500 profit] – [\$500 loss] = [\$0]

If risk-to-reward is 1-to-1.5, then the same 50% win ratio will result in a positive return…

[10 trades placed] x [50% losers] = [5 losses] x [\$100] = [\$500 loss]

[10 trades placed] x [50% winners] = [5 wins] x [\$150] = [\$750 profit]

[\$750 profit) – [\$500 loss] = [\$250 profit]

In terms of percentage return, this second (profitable) example would result in a 2.5% return based on the starting account balance (total equity) of \$10,000 after just 10 trades. This, of course, is the case when just 1% of total equity is put at risk. If 3% (\$300) is put at risk (a rather high amount to most veteran traders), then this same example (same track record) would yield a 7.5% return. . In other words, greater profits are achieved based on the exact same performance…

[10 trades placed] x [50% losers] = [5 losses x \$300] = [\$1,500 loss]

[10 trades placed] x [50% winners] = [5 wins x \$450] = [\$2,250 profit]

[\$2,250 profit] – [\$1,500 loss] = [\$750 profit]

Conversely, a high winning percentage (which typically necessitates a bigger margin for error, or greater risk) may actually result in smaller, less profitable returns over time. This occurs when the average risk is higher than the average reward. For example, using the same hypothetical \$10,000 account that’s risking 3% (\$300) let’s assume an 80% win ratio with an average risk-to-reward ratio of 2-to-1…

[10 trades placed] x [20% losers] = [2 losses x \$300] = [\$600 loss]

[10 trades placed] x [80% winners] = [8 wins x \$150] = [\$1,200 profit]

[\$1,200 profit) – [\$600 loss] = [\$600 profit]

So the trader that boasts an 80% win ratio may actually be less profitable than the trader with a seemingly unimpressive 50% win ratio. So the question is…do you want to be right, or do you want to make money? Believe it or not, even negative returns are possible with a higher winning percentage when risk far outweighs reward, so make sure to factor this in when performing due diligence in assessing a strategy and/or track records results.

“10 Dimes Make a Dollar”