I get a lot of questions on the topic of system accuracy, and in fact I just got another one today, which prompted me to write this article.

If you had to choose between 2 different trading systems, and one had a history of resulting in a profitable trade 80% of the time, and the other had a history of just 40% accuracy, which one would you choose?

Well, as you can imagine, most people would choose the 80% system. And without getting too wordy over this, it comes down to the fact that people hate losing. And I this is a throwback to our growing up in a world where the rewards are in being right most of the time, not wrong.

We see this in school, where students who get most of the questions right, are considered to be the bright ones in the class. And those that struggle academically are seen to be on the more challenged side of things. (As an aside, isn’t it ironic that the world is full of people who barely scraped through high school and/or university (and in some cases didn’t finish either), yet went on to become phenomenally successful in business or other endeavors)?

When you’re trading the forex, or any other tradable instrument, being right a lot does NOT guarantee overall success, contrary to popular belief. I’m constantly asked what the accuracy of a system is. Not many people ask what about the average reward is versus the average risk.

There are some extremely profitable systems out there that are right less than 50% of the time. And the reason for this is because the trades that don’t move are cut lose very quickly, and the ones that do get going are held for large gains.

On the other side of the coin, I’ve seen systems that have very high accuracy, well over 80%, that are actually losing systems! That’s because the wins, although frequent, are very small, and the losses are—you guessed it—very big!

The thing about a high accuracy system is that appeals to people’s need to be right, so it feels good. But high accuracy can come at a cost, so make sure that when you check out a system a high win/loss ratio, the system makes sense from a reward versus risk viewpoint—this is extremely important.

I would also highly recommend that when you do start trading any system, that you first start with either a demo account, or alternatively, you could use a micro account. The idea here is that you want to test before you commit. Losing a lot of money trading is totally avoidable when you have a firm grasp of proper risk management techniques.

In closing, don’t necessarily discard a trading approach because of the win/loss ratio. Examine the whole package before making any decisions. Much of it is going to be dependent on what your particular needs are.

I hope you found this article helpful. Again, just be aware of the potential risks involved in any trading system, but particularly in ones that advertise high accuracy. It doesn’t mean the system is no good, but you should look for a proven track record, as well as a rock solid plan for risk management and loss mitigation.

Thanks a lot!

All the best,

Vic Noble

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