I didn’t know that growing a small account fast was so easy when you actually follow this data.
I have been trading for around 10 years, and if I had known about this from day one, I would have achieved my profit goals so much faster.
When I was a beginner, I was told that a high win rate is good and you should always aim for it.
And a low win rate means you simply suck at trading.
So naturally, I was aiming for a higher win rate.
But there is only one way to achieve a high win rate consistently.
And that is by always following the trend.
The trend is your friend, but if you have a small account, then you better make sure it is your best friend.
People like to optimize things even more.
Some book smaller profits so that their win rate will go super high, like 80 to 90 percent.
And as a result, your account size should go up more consistently.
But then there are traders who aim for massive profit targets in hopes of catching big moves and growing the account faster.
This has a massive disadvantage because now the price has a lower chance of hitting your bigger profit target.
Beginner traders might think that a higher win rate and consistent profit will grow the account the fastest, but you will be surprised by what I found.
A high win rate actually made the lowest profit, and the lowest win rate made the highest profit.
Before you jump to conclusions and start using bigger profit targets because it made big profits, let me first explain what you are actually seeing.
This is an amazing piece of data from an uptrend, specifically the S&P 500 stock market uptrend on the one-day timeframe.
I took hundreds and hundreds of trades in this uptrend with different profit targets, from small to very big, to see which one makes the highest profit and grows the account the fastest.
The strategy I used to buy has three main steps.
First, the price has to be above the 200-period moving average.
Then the MACD indicator has to give a long crossover below its zero value.
And then I used the ATR indicator to set the stop loss.
The main thing to focus on here is the win rate and the size of the profit target, and it tells an amazing story.
When I set smaller profit targets and got a really high win rate like 80%, I basically didn’t make any money.
But when I booked five times more profit than my loss, I only won around 29% of the time, but I made almost 200% profit.
Does that mean we should always book five times more profit in a trend?
But there are two types of trends.
One is like the S&P 500 stock market trend that basically always moves in an uptrend in the long term, even if it drops in the short term.
But then there are short-term uptrends that you see in the forex market or on the smaller timeframes.
These don’t last that long, and the uptrend turns into a downtrend from time to time.
When I took hundreds of trades on these short-term uptrends and on smaller timeframes, I found two very important things.
First is that the five-times bigger profit target didn’t make the highest money.
And the second is that the highest win rate actually made the highest loss more consistently.
So I went a bit further and even tested on random markets that were not uptrending.
Even though the five times bigger profit got the lowest win rate of only 15%, it didn’t make the biggest loss, and the highest win rate made just as much loss.
Even when all of them were making a loss, the lowest win rate didn’t always make the biggest loss.
So far, the data said a high win rate actually sucks when it comes to growing a small account fast.
Setting big profit targets, even when the win rate gets lower, actually makes more profit.
But there is another way to increase the win rate if you want to set the same big profit but don’t want the price to trigger your small stop loss.
Some traders simply like to increase the stop-loss distance.
This also increases the loss amount, but since the price now has a lower chance of triggering the further-away stop loss, their win rate goes up significantly.
So when I tested this in the long-term stock market uptrend, I found two very important things.
First is that the highest win rate actually made a good profit, but then so did other profit targets as well.
That makes sense because in this uptrend, the profit targets are at the same place and only the stop-loss distance is changing.
The second important point is that the lowest win rate managed to make a similar profit with the lowest drawdown.
The highest win rate, on the other hand, made around a five-times bigger loss before making a similarly good profit.
So once again, the highest win rate actually performed worse in total, and the lowest win rate once again grew the account better.
Where the highest win rate made the highest profit was in a medium-good uptrend, like uptrends that are not continuously going in the upward direction.
But even here, it managed to do that with the highest drawdown or risk.
When the market completely sucked and everything made a loss, the highest win rate made the highest loss, and the lowest win rate made the lowest loss.
Once again, setting bigger profit targets is performing better.
All this data tells us three very important things.
Number one, a high win rate that is achieved by booking profits quickly or by setting a bigger stop loss is almost always bad in a trending market.
Number two, setting bigger profit targets even though the win rate drops is almost always superior.
It not only makes the highest profit and grows the account faster, but it also makes the lowest loss.
Number three, the only place where booking smaller profits performed better was in the medium quality trend with lots of bad market in between.
If you are not sure if the trend is really strong, only then it is a good idea to set smaller profit targets.
But the bigger question is, can you handle a really low win rate when you are a beginner trader?
Even though the low win rate made the highest profit, I don’t think most beginner traders can handle losing seven out of 10 trades.
That’s why people chase higher and higher win rates, but then those higher win rates don’t actually grow the account faster.
There is one easy solution.
When I booked the same profit and loss amount, I got a 60% win rate and made around 52% profit.
When I booked a 1.5-times bigger profit, my win rate dropped to 53% and I made around 85% profit.
And when I booked two times more profit, my win rate dropped below 50%.
The profit only went up a little bit to 91%.
As you can see, around the 1.5-times profit target, the win rate stays pretty good, and the profit is also pretty good.
The drawdown is also low.
If you start booking bigger and bigger profits after this point, the win rate drops pretty fast, and emotionally handling so many losses in a row becomes really difficult.
If you are losing seven or eight trades in a row, it will become very difficult to stick to your trading rules, and there is no way you will make big profits as a beginner trader.
A few years ago, I did a similar test where the win rate dropped significantly when I increased the profit target above 1.5 times, but the profit amount didn’t go that much higher.
A 1.5-times bigger profit target was the sweet spot, with a good win rate and good profit that beginner traders can actually handle.
If you want to grow your small account really fast, don’t aim for a high win rate by setting a bigger stop loss.
It only works when the market conditions are not that good.
If the market conditions are trending, always try to book way bigger profit.
But since most beginner traders can’t handle the low win rate that comes with this.
The sweet spot is a medium profit target that gives a relatively high win rate and high profit.