This is exactly what happened with many traders in February of 2020. In February 2020, the price was at an all-time high, and many traders were looking for a discount. Soon the price gave a big pullback, and by March 2020, many brokers, had a 100% increase in new stock trading accounts. Many of these traders, are in-experienced and are most likely to lose money. I would like you to meet some of these traders and watch very carefully, how an event or a chain of events that follows have a big impact on their lives.
It’s 4th March 2020, and the markets are at a good discount, after making a good move, in the upward direction. The price is near the 200 period moving average, and Bill is about to take a long trade using margin. At the same time, Emma is doing research on the market. She discusses the stock market with her friends, and fears, when a random person on social media, says the stock market is about to crash. Both of these people, are in-experienced in this field and have little idea about what information is right, and where to get it from. Both want to buy the stock market index, in the hope to make a decent profit. Bill buys because he thinks the price is at support, but Emma, decides to take advice from the television, and fears it might be a crash.
By the end of March 2020, the stock market index, was down more than 30 percent from the high. Many traders lost a lot of money, and people like Bill, who went long with margin, blew up their accounts. Since margin is like a loan from the broker, in the wrong hands, margin trading can be quite devastating. By the time Bill had lost everything, Emma had done a little bit of research and was ready to take a position in the market. Since she is not an experienced trader, she too ends up taking a long position, with a high margin.
After April 2020, the Stock Market Index starts moving in the upward direction with good momentum. By December 2021, the price was already up by almost 100 percent. Emma, not an experienced trader, who ended up taking a trade with borrowed money, makes more than 300%, in just around 1 and a half years, something that many traders only dream about. If she had taken the long trade, just 30 days earlier, she would have blown up the account like Bill. Just one month, made a big difference, on how they are going to look at trading in the future.
Even if there was no margin used while taking the trades, both Bill, and Emma, would have been sitting with a profit. However, because Bill bought early, he would have only made a 50% profit. Since Emma bought late, at a better discount, she would have ended up with almost a 100 percent gain.
This raises an interesting question, and it was also asked on the Trading Rush Discord Server. If buying late can make more money, why not take every trade late?
Let me explain that, let’s say, we are using the highest win rate trading strategy, that we have tested 100 times on the Trading Rush Channel. According to the strategy, if we want to take a long position, we have to wait for the long MACD crossover. We have to set the stop-loss below the pullback of the trend, and use a 1.5 to 1, reward risk ratio profit target. But instead of waiting and taking trades when the long MACD crossover happens, why not wait, for the price to move in the opposite direction a little after the entry signal? Let’s say, it has to move 50 percent of the stop loss distance, in the opposite direction. Taking the entry late like this will obviously result in a smaller stop-loss, but that will turn the 1.5 to 1 reward risk ratio, into a 4 to 1 reward risk ratio.
See in trading, the reward risk ratio, and win rate, are inversely related. This means, if you increase the reward risk ratio, the win rate will go down, and if you decrease the reward risk ratio, the win rate will go up.
Since the MACD strategy, with the 1.5 to 1 reward risk ratio, got a 62 percent approximate win rate, the win rate with the 50% late entry, should be lower. However, the counterpoint was, the price after the entry, goes in sideways, and in the opposite direction many times, and on top of that, there is also market noise. So by waiting for the price, to move in the opposite direction after the entry, we will run the risk of missing out on some excellent trades, but if the price, moves in the opposite direction, we get a chance, to make 4 times more profit, than the risk.
In one of the previous videos, I tested the 50% smaller stop loss 100 times. In simple words, I first took the entry, using MACD crossover, with a 1.5 to 1 reward risk ratio. Then, I made the stop-loss 50% smaller. And then I moved the profit target closer, to make it a 1.5 to 1 reward risk ratio trade. But then some of you in the comments mentioned that, if you don’t move the profit target, the 1.5 to 1, reward risk ratio, becomes 3 to 1. If we do this, the profit target of the 50% smaller stop loss, profit target of the 50% late entry, and the profit target of the normal reward risk ratio trade, stay at the exact same place. But all of them will have different profit potentials. Which one of these entry methods, will make more money in the long run? To find the answer, I am going to take 100 trades, with each entry method. Since we already know, MACD on Bitcoin, with a 1.5 to 1 reward risk ratio, gave approximately 62% win rate, I am going to test the other two methods, on that same market structure and same timeframe.
By looking at the reward risk ratio, you probably have guessed which one of these methods will give a higher and lower win rate.
With a higher reward risk ratio, comes a lower win rate. And because of that, we can even guess, the number of winners and losers in a row, the strategy can have. And because of that, we can guess, how much percentage of our account, we can risk per trade, to be profitable in the long run. And most importantly decide, whether or not that strategy fits, with the trader’s personality. If the win rate is low because the reward risk ratio is high, the strategy obviously, is going to have a bigger losing streak. Unfortunately, not everyone can handle losing multiple trades in a row. When a strategy is having 10 losers in a row, believing in that strategy, and the long-term picture can become difficult for many beginners. For them, a higher win rate strategy is more suitable, and you get that higher win rate, by using a smaller reward-risk ratio.
In theory, with 50% late entry, we should be missing out on some trades. And we did. In fact, on the exact same market structure, and by that, I mean where normal MACD and smaller stop-loss found 100 trades, 50% late entry was only able to find 66. Other 34 trades reached the profit target before the price moved in the opposite direction.
Since the 50% late entry, had the highest reward risk ratio, it also had the lowest win rate after 100 trades. And that resulted in the highest number of losing trades in a row. Even though the 50% smaller entry made money. Ask yourself, can you handle losing 20 trades in a row? For most of us, the answer is no. A smaller losing streak is much more preferable.
On the other hand, since the 50% smaller stop-loss, had a smaller reward risk ratio, it had a slightly better win rate and a much smaller losing streak. Surprisingly, 50% smaller stop-loss, made almost the same amount of profit, as the 50% late entry. If they both made pretty much the same amount of profit, is the high reward risk ratio, really worth it, when it makes you sit through a big losing streak?
In the main MACD strategy we saw on the Trading Rush Channel, we use the 1.5 to 1 reward risk ratio in the first place because we found out that it is the best after taking 300 trades. And we use a pullback stop-loss because we have data, that says it’s the best. And if we compare the 50% late entry, and 50% smaller stop-loss, with the main strategy. We can see that the main strategy, not only performs better when it comes to the win rate but also makes way more profit in the long run. In this experiment, it made almost 2 times more money!
Now ask yourself, which one of these strategies, and reward risk ratios would you like to use? As for me, the answer is the smaller reward risk ratio, so I can win trades more frequently, with a strategy, that has a high probability of making money in the long run.
That’s all. Get Trade Alerts, See how I take high win rate trades, and become part of the Discord community by supporting Trading Rush on Patreon. Thanks for watching!
