Which trading strategies make the most profits?
Our inbox is always full of inquiries wanting to know what are the best trading strategies and roughly two-thirds of these inquiries will mention one of the 3 Ps. These aren’t the famous marketing 3 Ps – Promotion, Position and Price, the 3 P’s we always get asked about are Pips, Points and Profit.
Questions like:
How many Pips can I make?
How many Points do you make a day?
How much profit can I make trading?
And the number one question is:
Which trading strategy makes the most profits?
Everyone wants to know what is the best trading strategy.
See below for the definition of Pips and Points.
Invariably, though well-meant, these are the wrong questions and simple answers will generally not help make you a profitable trader. In this article, we’ll try to answer these questions but first, we’d like to explain why they are the wrong questions.
What are the best trading strategies to make a profit?
Making a profit from an individual trade is easy: put a trade on in either direction, make the stop much bigger than the take profit and sit back until it hits the profit target. How many pips, points or how much profit did you make? 100 pips? 1,000 points? £10,000? $100,000? Are you ready to do it again? Can you repeat the process? Would you dare do it again? Or did you lose? Lost 200 pips, 2,000 points, £20,000, $200,000.
Maybe not so easy.
The big stop strategy
This ‘big stop strategy’ will win more trades than it will lose. But you won’t trade it because your losses will most likely end up exceeding your profits – despite the positive win-loss ratio.
A strategy that wins more than it loses isn’t necessarily a profitable one.
Spread bet and CFD trading is about finding an edge in the statistics of the strategies you are trading. There are only two really important ratios you really must understand: what proportion of your trades win vs lose and your risk vs reward. And It’s the combination of these that makes you a profitable trader in the long term.
Understanding Win-Loss in Trading
Simple. Or is it?
Take a coin toss
We all know that if we toss a coin enough times we’ll get a % ratio of 50:50. A lower toss number may change your ratio. It’s not unheard of to toss a large number of heads in a row and in small samples like 10 tosses, 20 tosses, 50 tosses, to see large skews to one side.
Keep tossing and eventually, you will get a 50:50 ratio. The accuracy of the ratio is directly affected by the number of tosses. And in the same way the win-loss ratio in trading is affected by the number of trades. Go on try it now, toss a coin 30 times, check your win-loss ratio at 10, 20 and 30. Do it again, how did the ratios compare? This exercise will help you understand Win-Loss and the statistical nature of trading.
The law of large numbers
For statisticians out there you will recognise this as ‘the law of large numbers’, where a larger sample size is more probable to get us closer to our ‘expected value’.
Some trades lose and some win. How many wins versus how many lose only matters if the loss mounts up beyond an acceptable amount. Ideally, you want to win more trades than you lose but the combination is variable for all traders and different combinations can work. You don’t actually have to win most of your trades. In fact, you could lose the vast majority and still make money if your winning trades are huge in comparison to your losing trades. But this type of trading is tough and requires a strong belief and faith in the strategy, maybe this type of strategy is best left to the automated algos.
Expectancy
The win-loss ratio of a series of trades using a trading strategy is also known as the ‘expectancy’.
In day trading the minimum number (the sample size) of trades to judge the success of the strategy is at least 20. So please don’t tell us a strategy does not work until you have assessed it properly over the course of at least 20 trades.
The mistake traders make is they will take a few trades with a strategy and abandon it if those trades do not work out for them.
When forward testing a strategy it is important to test it for this minimum number and accept the loss if it does not work. This clearly influences how much you should be prepared to risk on each trade.
We recommend risking small amounts of money on a new strategy as part of a professional trading plan.
The ‘Martingale’ strategy
“I know, I’ll just add to my losing positions so the market doesn’t need to come back in my favour as much”
A proper understanding of the win-loss ratio and the statistics involved means being careful if using any trade management techniques that increases the potential losses of a trade.
An ‘averaging in’ system – known as ‘Martingale’ trading – may initially work well, but there will be a time when the losses multiply so fast that your account gets wiped out. This type of trading has destroyed more traders and their trading accounts than anything else.
A Martingale System – After each loss double risk
Trade 1 Risk = 1
Trade 2 Risk = 2
Trade 3 Risk = 4
Trade 5 Risk = 8
Trade 6 Risk = 16
Trade 7 Risk = 32
Trade 8 Risk = 64
Trade 9 Risk = 128
Trade 10 Risk = 256
Trade 11 Risk = 512
Trade 20 Risk = 196,608
So 20 trades in a row can destroy the profits from 196,608 trades! In practice what generally happens traders stop adding risk at around 5 trades and this pattern repeats too often eventually ruining their account.
The reasons traders do this is because they will sometimes get away with it and so that reinforces the behavior.
Don’t do it.
Understanding Risk-Reward in Trading
I think we’ll need to toss a coin on that one.
We need much more information, we want to know how much was risked, how much was made, and what was the expectation for the trade. After-all a 100 pips / points / pounds / dollars win does not sound so good if the next 10 trades lose you 130 pips / points / pounds / dollars a trade!
Each of our trades risks a fixed amount of money, each will have a stop size that suits each individual trade. Even on the same market on the same day, we will individually assess where to put our stop. This approach means we are always making changes based on the current range and volatility of the market.
This changing stop size combined with the fixed risk size means the value per pip or point is different for each trade. As the trade progresses our risk-reward ratio will change. The trade may reach a first take-profit and we will reduce the risk on any remaining part of the trade to zero by moving the stop to break-even. We may move the stop to reduce risk before a profit target is hit if price action and the strategy used allows us to do so. What we never do is move the stop to increase the risk of a trade that is live – ie make the stop bigger.
Stop movement is a disciplined process
The correct movement of a stop is a disciplined trader process that takes time to master. Our members find that our Live Trade Room really helps them to learn to move the stop in a disciplined manner that improves their overall profitability. How many pips or points we make a day/week/month is clearly irrelevant. If you would like to discuss this for a greater understanding, then please do get in touch.
Your £ per point = risk / stop size.
For example on a DAX 30 trade, long 12,350, we may risk 100% of our fixed risk size of £1500 with a 50 pts stop. Our starting position will be £30 per point.
We may have an initial (T1) 75% take profit at 65 pts with a manual trailing stop (T2) on the final 25%. The initial risk-reward of this trade is close to 1:1 if trade just reaches T1. 75% of £30 = £22.5 x 65 pts = £1,462.5. If our trailing strategy results in break-even for the second 25% portion. Then the risk-reward will have been 1500:1462.5, which is close to 1:1. If the second portion (25% of £30 = £7.50 x 65 = £487.5) also makes 65 pts the risk-reward becomes 1:1.3. If the second portion turns into a great swing trade and makes 500 pts (and this does happen – see this video) then the final risk-reward becomes 1: 3.5. (75% of £30 at 65 pts = £1,462.5 plus 25% of £30 at 500 pts = £3,750).
In this GBP/USD example, short 1.25800 we may again risk 50% of our fixed risk size £1,500 = £750 but this time the stop size is 600 pips.
Our starting position will be £1.20 (min position in £0.1 increments) per pip (£720/600). We may have an initial T1 75% take profit at 800 pips at 1.2500 with a manual trailing stop (T2) on the final 25%. The initial risk-reward of this trade is 1:1, if the trade reaches T1 and the trailing stop on T2, becomes zero. £1.2 x 75% x 800 = £720. Risk £720 Reward £720.
The following trade (on the video below) illustrates a trade taken live in the Live Trade Room. The video shows the management stages of a trade. This trade started as day trade and turn into swing a swing trade. The risk-reward ratio changed at each trade management stage.
The best trading strategy is trade management
There are 3 important points here that majorly impact on our long term trading profitability:
- Active risk reduction of trades in action through trade management – reduction of loss
- Possibility of day trade turning to swing trade built into nearly every trade taken – increase of profit
- No negative changes to stops or adding to negative trades – no increase of loss
What is the best strategy for adding to winning trades?
Addition to a winning trade is something we do if the market gives us a new trade set-up in the same direction of our initial trade. Each trade addition is treated as a new trade and its risk-reward managed accordingly. The strategy and assessment for entering a new trade on a market where we have a trade running is exactly the same as a trade taken at any other time. Each trade is then managed, measured and recorded as separate trades.
We do not add to a trade that has not reached T1 as that will be increasing the risk.
Adding new trades to winning trades is clearly a winning formula. Adding to negatives trades, as we discussed when looking at ‘Martingale trading’ is a fast route to disaster.
Taking trades in the opposite direction on the same market as a currently winning trade is also something we do. These trades may hedge each other. We only take trades in the other direction if the trading strategy is clear and we would have taken it if there was no trade currently on. Both trades are then managed individually in the same way as we manage individual trades.
Now this may seem an odd thing to do, but each trade needs treating separately (they are statistically independent) and not linking with previous trades.
Note: Not all brokers allow you to trade in both directions at the same time. Please check with us.
How to make a losing trading strategy profitable
By looking at the records of your individual trades and the market price action (charts) at the time, you may be able to change the trade entry parameters or the management of the trade to produce better results. This process is best done manually and will result in making you a better trader with more faith in the trading strategy. Our Master Trader video training series will help you understand the best way to do this.
If your trading strategy is solid and is producing good trade entries, then the best way to turn a losing strategy into a winning one is to go back over your decision and management process of each trade and assess it in the same way you would manually back test the strategy. For this, you will need to have kept good records. No profitable trader succeeds without keeping good records. We recommend the Edgewonk trade log for trade recording and analysis.
The Secret to Successful Trading – The Holy Grail
In our Master Trader training series – these trading education videos are available to all our members, we explain the “Secret to Successful Trading”, and I don’t think it’s too much of a spoiler to give you the short version now: its understanding and accepting a loss. It’s definitely, absolutely not finding a “Holy Grail” strategy. There is no such thing. You become a trader when you accept this fact.
A trader uses trading strategies as a tool in the process of making a trading profit over a long series of trading. Just like a carpenter uses a saw – he’ll try to select the best saw for the job or he’ll adapt how he uses it. The trader’s toolbox will have a number of strategies and these may well be designed for particular markets, market circumstances and or time frames. The competent trader adapts their strategy to suit the current circumstances. And as explained above its the management of the trade that makes the profit and not the strategy.
All Spread Bet and CFD trading strategies work!
The main reason for trading strategy failure is nearly always psychological – fear of loss, fear of missing out, greed or anticipation. This psychological pressure is driven by the individual trader’s relationship with money and its potential loss. This is not something our evolutionary past or our education equips us to deal with. Our Live Trade Room specifically helps traders to discipline their trading and work through their psychological issues by focusing on simple strategies and trading discipline.
What is the best Spread Bet and CFD trading strategy for me?
Each of us has an individual trading personality, this is something that we develop over time and through our individual experience and our personal psychology and circumstances. We also have social or family limitations that are particular to us. These may restrict when we can trade, how often we can trade and how much time we can dedicate to trading.
If you wish to take many trades on short term timescales day after day then you should consider mastering scalping strategies. Watch our YouTube training on scalping here.
If you work full time and just want to trade in the evening and you don’t want to hold trades overnight then you need a strategy that suits these circumstances, consider learning The Algo Yank Strategy that has been designed specifically for evening trading the Wall Street Index – the DOW. Click here for details.
Talk to us about your individual circumstances and we will help you identify the right Spread Bet and CFD trading strategies for your individual circumstances.
What is the best Spread Bet and CFD trading strategy to start with?
A great deal of research has been done with successful traders and a future article will look more in detail about what we can learn from these traders. Suffice to say the most common trait is that they invariably did not use “advanced” trading strategies. At the core of nearly all the researched successful traders – whether they were full time, part-time or occasional, whether they classed themselves as swing traders, scalpers, trend followers or reversal traders, whether they traded on long time frames or short time-frames was Support and Resistance.
Understanding support and resistance levels and incorporating these levels into your trading is the basis of nearly all successful traders. Find out more about support and resistance here and also consider watching our Master Trader Series for greater detail on Support and Resistance.
What is the best way to test a Spread Bet and CFD trading strategy?
You will find many articles on back-testing strategies and these will nearly always concentrate on using the automation features of MT4 or other trading platforms to indicate how a strategy may have performed. This is a detailed science that may approximate potential performance but there is a fundamental flaw – markets change continuously and you will have heard many times before “past performance is not an indication of future performance.” Many times both experienced and inexperienced traders have put their faith and money in fully backtested automated systems that then fail to perform going forward and have suffered greatly.
Beware there are many – possibly thousands of automated strategies offered for sale or for free that promise to transform your earnings and change your life. They will not. But if they do, it’s more likely to be a negative change to your life.
Unless you have significant time available and are prepared to dig very deep into mathematics and programming over a good number of years we currently recommend you do not open the wormhole of automation.
A manual backtest and forward testing period of a trading strategy is the best way to learn as much as you can about the possible execution of the strategy. It’s also the only real way a trader can learn how to manage a future trade. A person who has not done a manual backtest themselves or uses data compiled by another person and just trades the strategy has no edge and cannot really be defined as a trader. They cannot make valid decisions on the management of the trade – and as discussed earlier it’s the management that produces the profit. They are less likely to trust the strategy and more likely to make fear or greed-based decisions.
How a trader should manually backtest is discussed and explained in our Master Trader Video Training Series available to all members of our Live Trade Room.
Conculsion
A successful and profitable strategy for one trader can be a poor and big losing strategy for another even if they are trading it on the same market at the same time.
There’s a little more below including links to other articles we know you’ll find useful.
Which trading strategies do we use?
These videos below are spread betting strategies (or CFD strategies) that we use all the time in our live trade room. They have worked for years on just about every markets that it is possible trade.
Spread betting tips
DAX spread betting
Trading Risk
We recommend that each trader has a properly thought-through strategy for assessing the correct financial risk for their personal trading. The amount of money this represents for each person is different.
Trading definitions
What is a PIP in Spread Bet and CFD trading?
What is a Point in Spread Bet and CFD trading?
What is a Tick in Spread Bet and CFD trading?
What is a Contract in Spread Bet and CFD trading?
Trading FAQs
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Informative.
I’ve never added to a looser, but have taken many loosing trades.
People want a few things, we’re creatures of habit.
A proven easy to understand and implement strategy, to understand money / trade management and to be shown over and over again how to do it.
Repetition is key to most normal people, we have something called muscle memory and over time of doing the same thing it becomes normal and natural.
Early on in any career we are impressionable, if we are shown it’s easy to make a million in a day then we will believe.
Undoing the bad habits and wrong thinking takes time and repetitive actions.
Great blog piece and information as always.
Mitch.
Good to hear you’ve never added to a loser. So many people do and it’s the most toxic thing you can do with your trading. Now adding to winners when appropriate…
Great post. Some very useful information in there. One of the most important in my opinion is find what works for you…
That’s it Wayne, got to find out what works for you according to your own preferences, personality etc.
Learned lots from the article. Two things I’d like to ask.
1) If R = the full risk of a position(stop loss size), what is the maximum R to afford as a percentage of the account that you would recommend.
2) Should we aim to always have the size of R to be lower than the size of TP1.
-Lets say R = 30 points , and TP1 >=30 points, so that R:R is 1:1 in case of hitting TP1
I realize both questions are highly dependent on the market and volatility but would be interesting to see your view.
Thanks,
Kaloyan
We don’t recommend risking more than 2%. Your account size is the amount of money you are prepared to risk – this may be different from what is actually in your trading account. The smaller the % risk the more likely that you will be disciplined in your trading. Many of the successful traders are just risking 0.5% per trade – but once again this is usually of their available trading pot rather than the amount in the trading account.
We always aim to get the reward equal to or greater than risk at the start of each trade. However, trades are active and have changing r:r as they progress. Some trades end up with a reward that was less than risk, but this is unusual. A lost trade is not always a full risk loss either: if we feel the circumstances have changed since entry, we may move the stop. A full 1R loss does happen but generally, we will look for exits that minimise these.
The live room trade DAX today demonstrates the changing R:R. This was a 35 stop and 50 T1 for 50%. Lots of R:R scenarios here. It was a half risk trade to start with, and that was because it was an early intraday trade with a relatively small stop. So if trade went straight to loss then that would have been 0.5 loss. If straight to T1 and then back to entry we’d have gained just 25 pts (T1 50% and stop breakeven) a 0.35 gain. The trade after T1 actually progressed through a number of stop moves and through each of these the R:R changed, it eventually closed with a T2 of 90 pts at half the size of the starting trade so 45 pts. The R:R ending up as 35:65 not far off 1:2 but as the trade was 50% standard risk it was 0.5:0.95 so pretty good. I know it sounds a bit confusing. The art is to not make your stop size and therefore your risk significantly bigger than your reward, get it closer to 1:1 and use trade management to reel in the big trade wins.
A final word – small stops do not reduce risk, in fact, they do the opposite. But that’s for a different post.
Thanks for the thorough reply Mike, makes a lot of sense to me. I was on board of that trade so I have reviewed it again 🙂 Actually its been 4/4 successful trades for me since I joined the room 🙂
Thank you TRP, for a massive informative process of why’s, why not ‘s and when, how, and the veryclear detail descriptiom of profitable traiding
This should I hope , fuel and inspire traders old and new through there career as traders. This is something which I will hold dear to my trading learning process and much appricated of the effort put to produce this for there members. Personally I im glad of this electronic exmaples and formulas which are linked above that would normally be at some Seminars and countless videos to buy and books to read.
Guys, TRP, served me well over the years come along see what you think or watch a video or two theoretical or practical as live trades done .
Tanks Dean.
Great article. I think it is important to align your trading with your life style and temperament. I haven’t achieved that yet so will keep testing different strategies and ideas.
This is a very informative article describing the way you trade and teach trading in the Live Trade Room.
Thank you TRP for giving very good trading advice and teaching that trading is more about waiting and making a few quality decisions instead of being an action packed experience.
I have learned that to me the psychological aspect is the most important part in trading. Learning to understand (and react well to) the feelings before a trade, when I’m in a trade, and not least when the trade is over (be it a winning or a losing trade) is paramount to my equity curve. The Trading Psychology Course is very good at explaining these issues.
I am currently following the new Master Trader Course. Great course – looking forward to the rest of the sessions.
Thanks.
Informative article, thanks. Emphasises for me the importance of remaining truly open as a trade progresses and dynamically managing it over time.
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