You make some very good points. I definitely don't view winning percentage in itself as an important characteristic and agree that a strategy has to have a high winner to loser size ratio as well. I guess I'm not sure why a strategy would have to have a low(er) winning percentage in order to successfully trade multiple markets, though. I definitely see the potential for a high winning percentage strategy to be quite difficult to take out of its original context, if it has been optimized, but it would seem to me that the logic of trading any liquid asset class, at an abstract level, is the same. That's more of a hypothesis than something I've empirically proven, though. Since you seem to have some fairly strong opinions and experience on the matter, though, I'd be interested to know, for example, what you think the "maximum" winner to loser size ratio would be for a strategy which was profitable on ~63% of trades (as per the Cohen quote you mentioned above) versus what you think traders with ~30% profitable trade rates can "max out" at.
Well, I'm not arguing a lower winning percentage is a necessary condition for success -- more so that it's a very regular occurrence. One could have a high hit rate for an extended period of time, and one of the large global macro traders in Invisible Hands says his long term hit rate is 50%. The abstract logic goes back to near term uncertainty, probing bets, and the way profits are typically distributed. If you use a tighter risk point, you can establish a position with larger size. But doing that increases the likely number of times you will have to test and probe before catching a meaningful move. Outlier profits then come on moves that are extra large, or offer high quality pyramiding opportunities, or otherwise provide the perfect moment to go "balls to the wall" with tightly defined risk. Well, that's the beauty of being a discretionary trader -- there really is no maximum to speak of, any more than there are maximum earnings for an entrepreneur. Let's say a trader is able to maintain a 63% hit ratio through extreme precision and tight risk control, but is also very, very good at spotting those rare outlier moments when all the stars align for a huge trend. Then say that trader establishes a huge position in Ford (F) at ~$2 per share in early 2009 and, thanks to a cushion of accumulated profits, decides to open up his risk envelope, riding it all the way to $13 per share. What would his R be if he originally risked 20 or 30 cents on the trade? There are also other ways to structure trades as such that, in certain circumstances, an outlier R can approach 50 to 1 or some such (or even a lot more). So it doesn't really make sense to talk about a cap or a max, assuming the versatility is there. Of course, I am talking about discretionary methods here rather than mechanical (or discretionary implementation with mechanical augmentation). But this also helps explain why the most profitable traders in the world are discretionary.
The 3 top trading books of all time: 1. Trade like a hedge Fund: James Altucher 2. Education of a Speculator: Victor Niederhoffer 3. Winner Take All: William Gallacher
I bought this book after hearing the mercenary trader website speaking highly of it. Its very basic technical analysis, and his track record is highly questionable given that when I looked on his website, there was a big hole in it- Per the factor trading website: The following performance table reports the month-by-month and year-by-year proprietary trading record of Factor LLC. Note on the performance capsule that Factor LLC <b>was not</b> in the trading business from 1995 through 2006 during which time Peter Brandt pursued full-time engagement of some non-profit social and political endeavors. https://www.factortrading.com//Factortrading/about_us_1.php
Hey dark horse. Nice to see you are still here. Reading between the lines, are you saying random entries have about the same success rate as ones made based on whatever?
Easily from your post. <b>I would characterize the argument a little differently. It is more that the methodology with the 30% hit ratio is going to be far more robust. It will be more armored against losses, since routine losses and aggressive risk control in respect to extended loss periods are already part of the program. </b> A 30% hit ratio would portend to be less than random, worse performance than truly random entries with tight risk control. Therefore, inadvertenly apparently, you are saying that random entries must work. <b>To further back up the distribution argument, Kenneth Grant, author of "Trading Risk," was a risk manager for many of the top dog managers at one point -- Jones, Cohen, Bacon and so on. In his book Grant remarks offhandedly that the vast majority of great traders he worked with had a 90/10 profit distribution, meaning 90% of their bottom line profits come from 10% of their trades</b> I have spoken to and interviewed Ken Grant for an article. He is one smart guy! Once again, if most profits come from 10% of trades, this logically leads to the conclusion that 90% of your trades will be break even, small winners or different size losers depending on risk control. Randomly entering, then holding or cutting depending on price action, would clearly result in these or better outcomes. right? <b>How do you catch a monster move born in uncertainty? You take multiple shots with small controlled risk and lever up opportunistically as conditions dictate. The real world manifestation of this is a series of small, low-risk probe type opportunities coupled with the profits from major outlier moves.</b> Clearly, if you have an edge making your entries better than random odds of success, multiple shots would not be needed to catch the outlier moves. You would catch the same moves with this methodolgy with random entries.