What is more important, trade accuracy or risk reward? Should I change what I am doing to try and get a higher accuracy? This is a commonly asked question we get on the desk from developing traders trying to increase their performance. Our answer, typically, is that there is a balance depending on your style, accuracy, win to loss ratio etc.
What tends to be very common with the newer traders is they believe it’s all about accuracy. They also wrongly use the GROSS rather than NET figures in calculating their edge. This partly is due to them using popular retail trade analysis websites which oddly display their figures in gross rather than net. All of our traders who use Sterling at TraderEquity get FREE access to PropReports giving them the clear NET figures to correctly work from.
A ‘scalper’ typically has a high accuracy but low risk to reward. This doesn’t mean that having a 1 to 1 risk to reward and a high accuracy would work as you need to remember we need to factor in overhead costs such as commission, ECN costs/rebates, spread and execution errors or mistakes etc. On the other hand some traders may have a very low accuracy of around 30% but a high risk to reward 1 to 10.
So depending on style, your return will depend on the balance between the two that you need to strike. You're looking for Positive Expectancy at the end of the day.
E = (WP x W) - (LP x L)
E : Expectancy
WP : Winning Probability
W : Average Win
LP : Losing Probability
L : Average Loss
What is very important, is to know your break-even points based on your NET figures. Having this information to start off with so you know exactly where you stand in terms of the maths is critical, especially if your edge in the market is small. But saying that always factor in mistakes, as your never going to be perfect!
Happy Trading !