With the new year right around the corner, we want to review our goals heading into 2022. There are two aspects to working the numbers as a trader. Our goal is to maximize our win rate as much as possible while maintaining a good risk:reward (R:R) ratio.
We can maintain a “good” win rate around 70% to 75% as long as we focus on clean setups, squeezes, and trends. We then use a proper R:R of 1:1 or 1:2 to maximize these setups.
Here are a few focal points to drive home:
- Let’s say we take 100 trades per year over a 10-year span. We have a 5% position size on each trade with a 70% win rate. Over the course of 10 years and one thousand trades, the compounding annual growth rate is 150%+ per year with a maximum drawdown of -15%. Working a 1:1 ratio, we could see serious yearly growth without much drawdown.
- Instead, let’s take this with the same 70% win rate and 5% position size, but using a 1:2 risk reward ratio. Over 1,000 trades the 10-year compounding annual growth rate is 250%+ with a maximum drawdown of -6%.
- As you can see, if you can work a 1:2 R:R, we can work the numbers for serious annual growth.
- Of course at times we will have trades at breakeven, with a small profit or small loss. The major thing to drive home is regardless of position size, at a bare minimum working a 70% win rate, a 1:2 R:R ratio can compound to strong yearly gains.
We are on the right path if we maintain a good win rate, focus on the best setups possible, and aim for a 1:1 or 1:2 ratio. The key after that is to work the numbers to enter the most setups possible.
Don’t build bad habits. Focus on taking one good trade after another. For serious growth, we want to work the scans, dial in our criteria for a good setup, and work those setups to maintain a strong win rate and risk reward ratio.
When taking trades, have an exit plan in place. In the Compounding Growth Mastery, I’ll be alerting exit plans with every new trade we take to ensure we keep our optimal R:R.
Remember, work a 1:1 or 1:2 risk reward ratio and sustain a good win rate near 70% to rock and roll into 2022 with serious account growth potential.
Stay Focused!