Coyote

Stop looking for “a strategy that never loses,” and build “a strategy that leaves a profit even when it loses.” Today I will explain why you can still grow your account even though losing is impossible to avoid, and the three points that make it possible. Looking for “a strategy that never loses” may seem rational at first. But it is a fantasy that completely ignores probability. That is because the market is affected by randomness and is uncertain. ・No matter how good an entry is, when it loses, it loses. ・No matter how perfect a strategy is, losing streaks always exist. ・No matter how skilled a trader is, losing streaks cannot be avoided. So what happens when you keep chasing “a strategy that never loses” or “a strategy that wins 100% of the time”? ・You become so selective about entries that you miss opportunities. ・You lose on a carefully chosen entry and lose your confidence. ・You cannot handle a losing streak and quickly change strategies. ・A small drawdown makes you think, “This strategy is no good,” and you throw it away. As a result, your consistency collapses, and you keep changing strategies. As long as you keep doing this, you will abandon every strategy during the losing streaks and drawdowns no strategy can avoid, no matter how much edge it has, so nothing you do will work. What you need to survive in the market is not “a strategy with a 100% win rate,” but “a strategy that leaves a profit even when it loses.” To build one, there are only three points you need to get right. The first is that win rate and risk-reward create profit. Many beginners mistakenly believe that “a high win rate means a good strategy.” But you can leave a profit even without a high win rate, and what matters is the balance with risk-reward. Even with a win rate of around 45%, a profit remains if your risk-reward ratio is 2 or more, and with a risk-reward ratio of 1, a profit remains if your win rate is 55% or more. All you need to do is keep trading only where the market’s direction and pressure lean one way. The second is “consistency,” which draws out your system’s edge. Your system’s edge, its statistical advantage, shows itself through the law of large numbers. In other words, the more trades you take, the closer your win rate and expectancy move toward their true values. In a market heavily affected by randomness, what draws out your edge is consistency. To make your system work and draw out its edge, “continuing to follow the same rules” is an absolute requirement. The third is managing your position size so that you never go broke. To keep repeating the same trades consistently, you need a position size that lets you trade safely over the long term. Keep each loss to a fixed percentage. Through testing in advance on a large sample size, decide a safe position size as a percentage based on your strategy’s potential losing streaks, drawdowns, win rate, and so on, and keep following it. This gives you the foundation for probability to work. Looking for “a strategy that never loses” is a denial of the uncertainty of the market. There is no “strategy that always wins” in the market. So what should you do? ・Focus on the balance with risk-reward, not on win rate. ・Maintain “consistency” to draw out your system’s edge. ・Build a large sample size safely over the long term, with a position size that never lets you go broke. These three are what create a strategy that leaves a profit even when it loses. If you are looking for “a strategy that never loses” right now, you are without a doubt on a dangerous path. Build “a strategy that leaves a profit even when it loses,” and keep executing it consistently. That is how a professional thinks.

Consistency is found only on the other side of drawdowns. Today I will explain why consistency and drawdowns can never be separated. A trader’s job is to prepare a strategy with an edge, keep following its rules consistently, collect every result that comes from it, and draw out the edge by letting probability work. Short-term results are driven by randomness, but long-term results move closer to the true probability. This is the law of large numbers at work, where a coin tossed only 10 times may land heads just 10% of the time, but as the tosses grow to 100 and then 1,000, the result moves closer to the true probability of 50%. That is why what is asked of us is not the win or loss in front of us, but consistency. We traders fail to stay consistent because we put too much weight on the win or loss in front of us, cannot accept randomness, and stop using the strategy during the losing streaks and drawdowns that are bound to come. While things are going well, we can follow our rules easily, but as soon as things go a little wrong, doubts about the market and the strategy arise, and we can no longer follow our rules. In other words, the moment we abandon a strategy is “always during a losing streak or a drawdown.” The effect of short-term randomness cannot be avoided, so as in the coin example, heads may land only 10% of the time in 10 tosses. This is where most people doubt their strategy and abandon it before the results move closer to the true probability. Judged by results alone, that is the same as having used a strategy with a 10% win rate. Then they switch from one strategy to the next, but because they always abandon each one in doubt during a losing streak or a drawdown, they keep hopping between poorly performing strategies forever. A strategy’s true performance shows up far later than the point where you gave up on it. Losing streaks and drawdowns can never be avoided. That is because short-term randomness never goes away. So the key is how fully you can accept this randomness. Try playing with a Monte Carlo simulation or probability simulation software using a large sample size. You will find that even a strategy with a fairly high win rate goes through drawdowns and losing streaks along the way that feel “impossible.” That is randomness. But the more trades add up, the closer the results move toward the true probability. The process of drawing out your strategy’s edge includes losing streaks and drawdowns. Of course, it includes winning streaks too. It includes every result, and there is nothing wrong with that. That is how it should be. That is because our job is to “average out” every result by letting the law of large numbers work. Irregular events are already part of the strategy. The key to gaining consistency is accepting even drawdowns as part of the strategy. As long as short-term randomness never goes away, drawdowns will never go away either, and consistency lies only beyond accepting them. Thinking long term, fully accepting randomness, building in risk management that assumes it, and continuing to follow your rules faithfully are all essential. If you have prepared a strategy with an edge through thorough preparation, think long term and act on the premise that you will keep trading over the long term.