Worden Discussion Forum
Stock and Market Talk
Win/loss ratio risk management question.
I was listening to a lecture about risk management, and the instructor was talking about a person who had a win ratio of 90%.
But his reward/risk ratio was upside down. His losing trades far exceeded his winning ones. The teacher then used an example of only 10 trades in which he could "blow up" his account if his win ratio dropped to 80%. He was able to say that in "X" number of trades, the trader would be suffer big losses in his account.
Some people in the class new the exact number of trades in which the account would go negative. It was a recording, so I couldn't ask any questions.
Can anyone give me an example of how this may play out, and how it could me mentally calculated?
Thanks in advance,
I think the concept is more importent vs. the exact calculation of when your account runs out.
Lets say you make $50 on a win, and $-250 on a loss.
"Winning 9 out of 10 times, you make $200 dollars:
If your batting average goes to 8 out of 10:
You lose $100
So you go from "making" $200 every 10 trades to losing $100 every 10 trades.
(obviously the (50/-250) numbers can be adjusted to make the account drain more or less)
So the amount of money in your account, and how often you trade, will determine when you go broke.
Thanks very much for the clear, lucid example! Very helpful!