How to be a profitable trader in the long-run

4 mins read
by Angel One

A trader should always thrive for profits in the long run. Few profits and few losses should not affect his psychology. They should always keep the big picture in mind. They should follow a business approach, not a speculative one.

So in this blog, I will share a method by which you can track your progress and measure your success. It will ultimately make you a profitable trader in the long run.

There are two important parameters you should keep tracking :

  1. Win Rate
  2. Risk-Reward Ratio

What is Win-Rate?

Win rate = No. Of profitable trade/Total No. Of trades.

For e.g., You took 100 trades out of which you made a profit in 70 trades, so your Win-rate will be 70%.

What is the Risk-Reward Ratio?

Risk-Reward Ratio = Average profit made in Profitable trades / Average losses incurred in loss-making trades.

For e.g., the Average profit in all profitable trades is Rs.2000 and the average loss in all loss-making trades is Rs.1000.

Then your R:R ratio will be Rs.2000/Rs.1000 = 2:1.

And by these ratios only your profitability is calculated:

Win Rate * Risk-Reward Ratio = Profit.

Let’s understand this with an example:

Suppose your Win-Rate is 60% & your risk-reward ratio is 2:1

That means you make Rs.2000 in profitable trades and lose Rs.1000 on every loss-making trade. And you take 200 trades in a month (on average every option trader in Angel takes 200 trades in a month).

Win Rate – 60%

Risk-reward ratio – 2:1

No. of trades – 200 Per month

So, with 60% win rate in 200 trades, you will be profitable in 120 trades and the loss will be in 80 trades.

Average profit.loss No. of trades Total profit/loss
Profit – making trades 2000 200 x 60% = 120 120 x 2000 = 2,40,000
Loss – making trades -1000 200 x 40% = 80 80 x (-1000) = -80,000
Total Rs. 1,60,000

So, after taking 200 trades you will be Net profitable with Rs.1,60,000 by trading 1 lot of Nifty.

So this is the profit-making potential if you maintain a 60% Win-rate & 2:1 R:R ratio. But this number, not many traders will be able to achieve.

If you toss a coin, there is a 50-50 for head or tail.

Similarly, in trading if you are being random, there will be a 50-50 chance in the long run.

But if you improve your Win-Rate to just 55%, just 5% better than randomness.

And with an R: R ratio of just 1.2:1, i.e., you make Rs.1200 avg profit and Rs.1000 avg loss.

Win Rate – 55%

Risk-reward ratio -1. 2:1

No. of trades – 200 Per month

Average profit.loss No. of trades Total profit/loss
Profit – making trades 1200 200 x 55% = 110 110 x 2000 = 1,32,000
Loss – making trades -1000 200 x 45% = 80 90 x (-1000) = -90,000
Total Rs. 42,000

You can make a Net Profit of Rs.42000 in 200 trades with just 1lot of Nifty in this way.

So this is how you can track your progress and excel in your trading by keeping track of these two crucial parameters, Win-Rate & Risk-Reward Ratio.

Some quotes on Process-oriented trading/ System-based trading :

“Loss or not, if you followed your rules today, you did the right thing”.

“A beginner with a trading plan can beat a genius without one.”

“One good trade after another. Trust the process. If you do that,

the money will take care of itself.”

So, focus on the process and keep monitoring these parameters. It will help you improve them day by day. Once you achieve more than a 50% Win-rate or more than a 1:1 Risk-reward ratio, do it consistently, and follow the process. You will be able to make money consistently month-on-month in the long run.

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