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# Do You Really Need Higher Accuracy For Profitable Trading?

June 16, 2016

I see many traders especially, the new ones obsessed with accuracy. They are always hunting for the trading system with higher accuracy. The Internet is full of sellers who are selling trading systems, software which actually do not work and they claim to have very higher accuracy. Many tips sellers also claim to have 90% accuracy.

Let’s understand mathematically how a low winning rate trading system can make more money than the high winning rate trading system.  The earning power of any trading system can be calculated as

E = (W x AW) – ( Lx AL)

E= Earning Power

W= Wining Rate

AW = Average winner

L = Losing rate

AL = Average loser

Let’s take a trading system with 50% winning rate. Now, assume average profit on winning trade is Rs 500 and the average loss on losing trade is 350 Rs. Then the earning power of the system will be

E= (50% x 500)- (50% x 350)

E = 250 – 175 = 75 Rs

That means this system will give average profit of 75 Rs per trade

Let’s take another trading system with an accuracy of 40%. Average profit winning trade is 1000 Rs and average loss is 350 Rs Then earning power per trade will be

E = (40% x 1000) – (60% x 350)

E = 400 – 210  =  190 Rs

This trading system will earn 190 Rs per trade that 2.5 times more than that of the first system even though it has much lower accuracy.  It’s clear that lower accuracy doesn’t matter when the average profit per trade is higher.

If your profits are large you don’t need great accuracy. What matters is risk reward ratio. You can read more about how a better risk-reward ratio can maximize your profits.

Risk Reward RatioRequired Accuracy Rate
1:160%
1:245%
1:2.535%

#### 1 Comment

1. Rajen Vyas

Good one. Thanks.

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