65% win ratio with 1:1 risk/reward?

Discussion in 'Strategy Building' started by BillySimas, Jun 23, 2008.

  1. I'd just like to keep my drawdowns as low as possible and what better way to do that than to keep my win rate as high as possible.



     
    #31     Jun 24, 2008
  2. Makes a ton of sense. Good luck!! :)

     
    #32     Jun 24, 2008
  3. CBuster

    CBuster


    Think you need to chill out a bit - you seem to be throwing facts around when they are really your opinions.

    To be fair, I actually do agree with your basic points. However, scaling out can have benefits on occassion, esp given maximising profit is not your only goal (well, it's not mine anyway - I look for low draw downs, risk adjusted returns).

    Using multiple exit points can reduce risk and significantly change the shape (smoothness) of your equity curve. You also need to consider that risk in not entirely limited by a stop loss order in place. Stocks can be suspended, major news can lead to massive slippage on stop orders, etc etc.

    To answer your original question - I have an intraday system (seconds to minutes) that trades equities, with 75% win rate. Average loser is similar size to average winner. So definitely possible.

    FWIW I do scale out to a limited degree. Why? Most of my edge is in my entry anyway, it helps hide my size in the book to have multi-limits per stock and when I have most my profit I want some risk off the table - we have all seen stocks move +/- 10% in a blink when news hits. Scaling out sure doesn't help my bottom line in the long term, but it helps to make the daily equity fluctuations easier to deal with.
     
    #33     Jun 25, 2008
  4. How does taking smaller profits smooth your equity curve? I'm not contesting it, I'm just wondering how it works for you. Could you give me a specific example with numbers?


     
    #34     Jun 25, 2008
  5. CBuster

    CBuster


    Without wanting to spend ages with loads of specific examples:

    Consider a situation where I am long a stock from 25.00. My research tells me that the "optimal" profit target is 25.25. Stop might be 24.75. Market edges up to trade .20 or .21. My system might begin to scale me out around here. If market reverses back to b/e or worse, at least I have partial profits. If market rises to my original target, I miss out. i.e.

    - In a situation where I would have been right to wait for 20.25, my equity curve is upward sloping, but not as steep as it might have been.
    - In a situation where the market reverses before hitting the optimal target but after some move in my favour, my equity curve is (shallow) upward sloping, rather than flat or even down which it would have been if I had held out.

    [edit] - thus u can see that, in both scenarios, equity curve is up-sloping with scaling out vs occasional dips if holding out for the optimal target

    This is very a v simple example and I am not advocating always scaling out or super tight profit targets, etc. Results will depend on the strategy at hand and other trade management rules. However, overall it is easy to see how scaling out CAN, and often(but not always) will result in smoother equity curves (but ultimately less profit per share).

    Of course, you can also argue that, even if the optimal profit target gives higher profit per share over the long run, if scaling out does indeed impove consistency / risk adjusted returns, we can grow size more rapidly and hence make more total money this way anyway. That's my approach - when market capacity becomes a problem (cannot up my size any more), it might be worth reconsidering.
     
    #35     Jun 25, 2008
  6. Yeah I couldn't agree with you more, in fact with my strategy I am noticing more and more often that it will trade up to 90% of my target before retracing fully (just like yours from what it sounds like). I try not to even pay attention just because its counterproductive to get involved in each individual trade, but I am more inclined to lower my drawdowns over maximizing profit just like you. It seems being right is important for guys like us, although we both know the old adages about it.


     
    #36     Jun 25, 2008
  7. lindq

    lindq


    If your system is 1:1 risk reward, then taking profits early is not trading your system.

    You will essentially be letting your losers run to the stop, but pulling your winners early.

    You won't last long playing that game.
     
    #37     Jun 25, 2008
  8. Why does the risk reward matter? It seems you're implying that it would work with a more favorable ratio. I'm trying to understand why that would be the case, could you explain?


     
    #38     Jun 25, 2008
  9. neke

    neke

    if we assume that for any quick profit taken, there are probably some you are lucky to take the quick profit (the position never gets to your intended target), overall your win ratio should rise, from say 65% to 75%. Whether it reduces your long-term profitability cannot be determined merely by the fact you took profit early (provided you've factored in the trading costs when taking quick profit).
     
    #39     Jun 25, 2008
  10. I'm feeling like a moron today, I can't figure this out. I'm inclined to think that if your stop is the same, then it definitely can't be more profitable if you scale out. This is just basic math, pick any parameters you want or refer to that link I posted earlier about this. What I'm confused about is this: if you get out earlier, your increased win ratio should offset the extra money you're losing when you're wrong. So it's the same as far as I can tell. Somebody help please, I'm retarded.



     
    #40     Jun 25, 2008