Stock Trading Strategies

Stock Trading Strategies: 95% Winning Trades… and Still Losing Money?

By Dr. Steve Sjuggerud, Chairman, Investment U
Monday, July 11, 2005: Issue #451

When sizing up various stock trading strategies, what’s the right “percentage of winning trades” to look for?

Since a lot of advertising for stock trading and investing systems make promises like “90% winning trades,” I thought I’d take a minute to let you know what that really means - and what returns are really possible

Vic Sperandeo is one man who should know what the right percentage of winning stock trades is. After all, according to his book, Trader Vic II: Principles of Professional Speculation, Vic’s track record was 70.7% gains a year without a losing year from 1978-1989. In that book, he tells what usually happens to stock option traders using strategies in which 90% of the trades are winners:

“A lot of floor traders, especially the younger ones, love to sell options. ‘The fools,’ they say, speaking of the options buyer, ‘they just keep giving me their money, and I keep selling them options that end up expiring worthless.’ For 11 months of the year, they can report a 90% success rate selling options. But in the last month, seemingly out of nowhere, the market moves 10% against them. They find themselves shelling out a lot more money than they had made, or even going completely broke.”

The False Promises of Stock Trading Strategies

You may be surprised to learn that even trading strategies that promise a batting average of 900 percent can still cause you to go broke.

On the other side of things, hedge fund legend Nassim Taleb may actually only be right a few times a year. But his winners are so large, they more than offset a mountain of losers. (He is the author of Fooled by Randomness, a good book for advanced investors.)

So the ones who get it right 90% of the time end up going broke, according to Trader Vic. And the guys who are right only a few times a year like Nassim Taleb become legends. This turns everything on its head.

What Should We Look for in Winning Trading Percentages?

In all my experience, I’ve found that great investors / traders only need to be right about 35% to 40% of the time.

There is no “right” percentage. In fact, you almost shouldn’t care what percent of the time you’re right. What you should care about is the total return on your portfolio.

Great investors generally cut their losses early and let their winners run. So if their average loss is only 10%, and their average winner is over 30%, then even if they have two losing trades for every winner, then they’re still up by 10% across those three trades. This is a good example of a winning system, and it’s actually a stock trading strategy that’s wrong 67% of the time!

I brought this topic up today because a family member told me over the weekend: “Steve, I’m only losing money on one of your stock recommendations right now. You’ve been right like 95% of the time with your trading strategies. But we need to talk about that one that’s down!”

Strategies for the Long Haul

Whoa, wait a minute. Yes, my track record on stock trading strategies has been good. But you can’t expect me or anyone to be right 100% of the time. The important thing is that your investment portfolio grows over the long haul.

In fact, since I cut my losses early, I’m quite comfortable being right only 40% of the time. If I have three trades that are 10% losers, and two trades that are 30% winners, then I’m up 30%. Sure, I was only right two out of five times. But that’s not what matters. What matters in our trading strategies is that we’re up 30% total over the course of five trades.

To sum it all up, don’t be impressed by trading strategies and track records that advertise “90% winning stock trades.” They may only make you a few pennies per each stock trade. And the 10% of the trading that loses may actually cost you everything you madeand then some.

The only thing that matters about stock trading strategies is the end result. Generally the greatest investors in history have only been right about 35% to 40% of the time. But they cut their losers early and let their winners ride. If it’s good enough for the investors with the greatest track records in history, it’s good enough for me and it should be for you, too.

Good investing,

Steve

Today’s Investment U Cribsheet

Books like Market Wizards: Interviews with Top Traders, which interview the greatest stock traders and investors in history, are really good for learning what works for the greats. One of my top “secret trading strategies” has been to figure out what the great investors in history have done, and see if it’s applicable today. It usually is.