If you want to trade successfully, you really have to master and perfect one skill: the art of failure! “I beg your pardon?” You are probably thinking now. “I don’t want to fail, I want to be successful on the stock market – may be later even earn my living with it.” Even if it sounds paradoxical at first, it is true! Any experienced trader will agree with me immediately and one hundred percent: Success in the stock market has a lot to do with defeat and skillful failure. The art of failure doesn’t mean you should keep losing. But it will inevitably happen! There is no top trader who does not regularly produce false trades.
“Without a single losing trade, you will never get through the trading life. Losses are part of the concept. “That says Rocco Gräfe, who has been running one of the most successful DAX trading services in Germany for many years. Losing trades are normal. The difference is how you deal with these bad trades or defeats. Most trading newbies are not good at one thing: lose! So we wait and see whether the losing trade may turn into positive territory after all. But he rarely does us favors. The result: a few capital-losing trades completely wipe out the result of many small winning trades. This is not how you become a successful trader! So we wait and see whether the losing trade may turn into positive territory after all. But he rarely does us favors.
The result: a few capital-losing trades completely wipe out the result of many small winning trades. How not to become a successful trader! So we wait and see whether the losing trade may turn into positive territory after all. But he rarely does us favors. The result: a few capital-losing trades completely wipe out the result of many small winning trades. This is not how you become a successful trader!
Limit losses, let profits run
Anyone interested in trading has probably heard or read this stock exchange wisdom before. Sounds simple, but it’s not! Because actually we humans with our genetic disposition are not at all suitable for the stock market business. As soon as our trade is a few points up, the finger on the mouse button begins to twitch. We want to pocket the profit immediately so that the “booty” doesn’t escape us again. And if there’s one thing we hate, it’s a failure. We prefer to postpone them as long as possible. Unfortunately, in our genes there is precisely the counterprogram to stock market knowledge: Instead of “let profits run and limit losses”, we are programmed to “limit profits, let losses run”. Not a good starting point for trading, but there is a chance!
We need to discipline our emotions
If you ask experienced stock market experts what the three most important things in trading are, you usually hear this advice: discipline, discipline, and discipline. So there seems to be something to it. Unfortunately, if you want to trade successfully, you have to trick yourself a little. It’s about disciplining our emotions. This is most effective when we give ourselves rules – if possible, rules that do not allow any emotional leeway. An example of such a rule: In the case of a wrong trade, I allow a maximum of a minus of ten to fifteen points, then a stop already set at the entry takes effect. There is no exception to this rule! It remains to be seen whether ten or fifteen points make sense. First of all, it is about clear rules.
Nobody knows whether the DAX will rise or fall
How high are our theoretical possibilities of being successful with a trade? Statistically, unfortunately, not much better than a coin toss: about 50 to 50! Because nobody knows whether the DAX will rise or fall the next day – not even Rocco Gräfe. But the stock market expert has one big advantage: through knowledge of technical analysis and a lot of experience, the hit rate can be increased to around 60 to 40. Even top traders cannot achieve a hit rate better than 60 percent – especially over long distances. Fortunately, this is not necessary to trade successfully.
Earn money even with a low hit rate. Photo: Pixabay Profitable even with a hit rate of only 40 percent
Another factor is much more decisive than the hit rate itself: the risk-reward ratio (CRV). It shows the relationship between the maximum loss and the expected profit of a trade. For example, if you risk one euro on a trade to win one euro, your CRV is exactly 1.0. If you are planning a profit of two euros with the same risk, then the CRV of your trade is 2.0. Why is it so important to know now?
The table below shows how high the CRV has to be in order to simply keep the capital constant with different hit rates. You haven’t won anything with that. For the sake of simplicity, trade costs are not taken into account in this calculation example:
Hit rate 60%> necessary CRV 0.50
Hit rate 50%> required CRV 1.00
Hit rate 40%> necessary CRV 1.50
Hit rate 33%> required CRV 2.00
Hit rate 25%> required CRV 3.00
Hit rate 17%> required CRV 5.00
The good news: Even if 83 percent of your trades fail and only 17 percent succeed, you can still trade profitably. The bad news: Each trade must then generate at least 5, better 6 times as much profit as you would have risked. Implementation is likely to be difficult in practice.
You can also draw another conclusion from this valuable table: If, with an average hit rate of 40 percent, each trade cannot achieve at least 1.5 or better 2 times your risk, then you should not even open the trade. And that in turn is very important to know.
Every trade needs careful planning
Sorry if this consideration seems a bit mathematical and dry. But precisely in this approach lies the secret of successful traders! They don’t just frantically press the mouse button every time the price rises but plan every trade. What can you do now for your trades?
The first step is to be clear about your average hit rate. This can already be determined when trading in a free demo account. Once you have a feel for a realistic hit rate, the second step is to plan the risk and CRV required for your trade. Experience has shown that you should not enter into a trade that does not promise at least a CRV of 1.5 or better than 2. With this default, you should actually be on the safe side.
Improve your hit rate
It is of course beneficial if you can also increase your hit rate. A key to this is knowledge of technical analysis and, in addition, a lot of experience in assessing charts: What are favorable constellations for entry – and what is not. Of course, that doesn’t happen overnight. Trading is like any other professional training: you have to learn it from the bottom up. On CFD trading, we are now starting an extensive trading course. From now on you will find a new episode of our trader training week after week. It’s best to stop by here regularly. Because even top traders have started from scratch.
