The Deceptions of Marketing to Traders

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You see all this advertising to sell trading systems and sell trading strategies. When you look at these, you see the results that they trumpet and usually when we see the results, they trumpet, they get right into win rate. A winning rate of 88.89%. A 91.03% win rate. 72% success rate, 90% wins, 98% win rate. Why is this? This is because the marketing is meant to appeal to people because the system seems like it's always right. This is called the need to be right bias. We as humans really want to feel like we are right. We go to school, what's our goal for our grades? To get 100%, to get a 99%, a 98%. What's an A? An A is anything over 90%? What's an F? Anything under 60%. So under 60% for most of us equates to failure. Failure. So everybody in trading wants to be right. They gravitate towards the systems that are marketed with high win rates. The problem is that when you go and you look at the greatest traders in the world, they typically don't have high win rates. A win rate in the 40% or 50%s, 40s, or 50s, is enough for them to become millionaires, decamillionaires, centimillionaires, billionaires. They don't need to be right 80%, 90% of the time.

Remember, the thing that works in trading is usually the opposite of what everybody thinks. That's because group psychology comes in and the mass psychology kind of takes over, whatever the mass does, does not work. Let's talk about this for a second. How do you create a high win rate system? Well, one thing, if you go and you look at the details, you'll often see that they're only marketing close trades. What this means is they're only showing you the results of a trade that has been bought and sold and is closed. By doing this, as soon as the trade is profitable, they can close the trade to show the high win rate and say, "Look, we make money all the time." If you actually go and look at the trades that are not closed, the trades that remain open, what you'll see is they're often times they're losers. What are they doing? They're waiting for these losing trades to turn around and come back as soon as they're a winner or as soon as their break even, they'll close them. What happens if they never come back? How come down and talk about that? We'll come back to that.

Now, practically speaking, if I want to create a high win rate system, there's just a few things I can do to get there. One is I can widen or remove the stop, I can make the stop really, really, really wide or not have one at all, then again, I only exit when the trade becomes profitable. You'll see this. Larry Williams, whom I have immense respect for, by the way. I've learned so much from Larry Williams and a lot of different ways he built trading strategies, but one of the things Larry would do is he'd run a strategy and you'd hear him say "We're going to exit the first profitable close."Well, that allowed him to book a win, book a win, book a win, but when you traded these systems, if you trade them side by side with them, you'd make money, make money, make money and then you get clobbered. You lose a whole bunch of money. This is because the losses, when you actually lose money, they're so big, they wipe out multiple gains. This creates strategies that have a horrible reward to risk ratios, you make a little, lose a lot.

Another way you can do this is by doing option strategies, option strategies that sell options naked or sell spreads. They often have high win rates and that is because they're built on a distribution, saying well, most of the time the market is going to be within one standard deviation or within two standard deviations. If I engage in an option strategy that I sell options, just beyond two standard deviations in theory, just by that alone, I'm going to have a 90% win rate. Just ride them out and let them all go worthless. Again, the problem is that when you get a losing trade beyond two standard deviations, the losses could be big, and the tails are fat. They're asymmetric, we get what's called kurtosis, where the tails are really, really big. By doing this, we have lots of wins. Lots of little wins, but occasionally massive losses.

Another thing that these marketers will do is they'll market the strategy when it's on a winning streak. The strategy wins 95% of time, look at the results, all it's done is win and it wins and it wins and it wins and wins and then if it goes through one of these periods that we see in bullet 2.2, or 2.3, where the big losses come, they just shut it down and start marketing a new strategy, leaving you with the losses. We don't do that.

So next week I'm going to share a table with you that we teach our students. It's a table on reward to risk ratios versus win percentages, and it's incredibly enlightening. I'll go over this with you next week and you can start to see how great trading systems are really built, but until then, don't be deceived by these kinds of numbers. They're usually bullshit. Stay tuned every Tuesday for additional webinars like this where I'm going to come and share tips with you on different ways to think about your trading to take it to an elite level. I'll see you next week. Bye.