If you're trend following, just make sure that you have broken out into a fresh 'value area' or have settled above or below recent S/R with a hard exchange settlement print and more follow-through the next day during the NY open. If NY holds the new trend development, go with it and don't fight it. Let them do the heavy lifting. Trade range for confirmation. Multiple time-frames in your modeling will help tremendously.
I have never heard someone say this before , LOL. Great money management rules can make any method much better, and by concentrating on lowering losing percentages, to me, is more important than increasing win rates. You can have 80% win rate and still lose money if risk to reward too great and comm eating you cause too many trades. I prefer to build methods that work well in chop, and should Price starting trending, am already in. I do have many more small profits and breakeven trades, but do get occassional nice thrust moves and look to add on after retracement. For me, very profitable trades never come back to entry, allow me to get in and take off.
Let me do the math for you; 100 Trades; 35% win rate; risk: reward = 1:3; risk per trade = $100 65 losses x $100 = $6500 35 wins x $300 = $10500 Profit =$4000
Well I must interject here because I have done extensive evaluation of all the things discussed in this thread (win rate vs draw down & ruin, and TOTAL profit). This will be a long post to prove beyond a doubt (I hope) that #1) win rate effects RISK OF RUIN and DRAWDOWN. #2) that profit is mostly related to your R return per winning trade but the lower the win rate the harder it is to keep your high R returns with a trend trading system because of the long losing streak you have when win rate is lower. If you do not wish to read the entire post then skip it. Bottom line,..the truth lies somewhere in between what everyone is saying but TrendTrader Jim is MOSTLY correct. See the following MC simulations to show why. The MC simulations are running a 200 trade simulation in a year repeated randomly over 1000 times (you can do 10,000 as is typical but in interest of time I ran 1000,..results are essentially the same). It is assuming $100,000 starting acct and a risk of 1% with the 35% win rate system and 3.5% in a 80% system. I chose these numbers because they are numbers quoted above by deadog, Wide Tailz, kut2k, intradaybill and others. 1% risk is typical of most systems. I chose 3.5% risk with 80% win rate system because this is MUCH HIGHER than the 2% limit that most tout as being MAX RISK. The sims also take into account $7 commision per trade. Lets look at 80% win rate and 3.5% risk first (80% & 3.5%). Wide Tailz is correct in that the higher the win rate the less money management rules come into play. This is because of the higher the win rate the fewer string of loser you get and the less draw down. See the 80% & 3.5% simulation and notice that the LOWEST PnL after 1000 trades is a 29% draw down (DD) during the simulation but FINAL LOW PnL is STILL POSITVE at +$41,000!! Thats 41% return. You will NOT have a losing year NO MATTER WHAT because you have so few losers in a row. Notice that MAX losing streak with this system is 9 in a row. Max winniner is 48 in a row!. You may also notice that I have chosen a losing trade as being 1 R (-$3500) and a winning trade as being 0.5R (+$1750) so that this is just a modest profit per trade and nothing out of the ordinary. You make less profit per trade but the outcome is relatively little draw down and 41% return MINIMUM,...average is 141% return and maximum is 220% return. Conclusion, high win rate limits your max drawdown and allows you to risk more per trade with little or no risk of a losing year. Now 35% win rate and 1% risk (35% & 1%). This system was given a 1R loser (-$1000) and a 3R winner (+$3000) as described by deadog above. Notice that the string of losers raises dramatically to a maximum of 26 in a ROW!! How many of you would continue to trade a system with 26 loser in a row? How many of you would trade it FAITHFULLY? I doubt any one would. I know if I had THAT many losers I would question my system and probably start changing it. This effects the outcome of the system as well and probably real world outcome would be WORSE than this simualtion which assumes you trade your system perfectly. We all know human error and emotions effect trading as well. With that many losers in a row do you think you can keep your emotions out of trading and trade your system perfectly?....DOUBTFULL!! Also notice that the MAX draw down is the nearly the SAME (-30%) as the 80 & 3.5 system. However, even IF you traded your system PERFECTLY you still run the possibility of having a losing year with -$14,600. Average profit is a solid 79.8% (+$79.8K) and max profit is also impressive at 165%. Conclusion, despite much larger wins (3R) the large number of losers in a row will effect your outcome dramatically. You still have a substantial risk of a losing year but on average you will profit. With lower win rate systems you have a wide disparity in your overall profit at year end and increase your risk of a losing year despite the higher profit when you win. Final conclusion is win rate effects drawdown and risk of ruin but does not effect profit. You can run these simulations any way you want,...I have and the conclusion is the same. So everyone is sort of correct. Think of trading a low win rate system like the lottery which is the ULTIMATE low win rate system. For example,...In the lottery you risk $1 to win a profit of $250 million. But your win rate is exceptionally low (1/300 million for example). This is the extreme example of a "trend trading system" like 35% & 1% above. So again Profit is NOT effected by win rate as you stand to profit $250 million with minimal $1 risk but your string of losses will make this "system" highly likely to result in a losing year and cause you to stop trading it. I hope this helps. Good Luck. N54_Fan
yea and no, stops and size are one and the same. Half the size = twice the width of the stop. Small size which is a wide stop may make less in the short run, but in a strong trending mkt you are looking for a hig move and need staying power to survive. True, it's a toss up, half the move with big size or twice the move with small size. If it's chopping tighten the stops (or increase size, same thing) and take what small profits you can get. If it's trending, reduce size without any change to your risk profile based on account balance and give yourself some survivability for the big move. There's no way I know of to do the same thing all the time and turn the mkt into an ATM. 90% of it is just money management, but 10% requires actually reading the mkt and having an opinion, and guessing right.
Beware now, the crank of ET kut2k2 may accuse you for being a sockpuppet. So many here confuse profit potential with risk of ruin. It is amazing that these individuals do not feel any embarashment at all. It is also amazing that the crank kut2k2 does not even understand what he wrote in the other thread where he plagiarized a risk of ruin proof which shows that if the win rate is less than 50% ruin is inevitable if one trades without a cummulative profit target. I can't believe that guy is such a crank and an imbecile.
Do you know what is a binomial distribution? Do you know what starting capital means? Do you know what drawdown is? I guess you don't.
I am not here to pick a side or anything. I just want people to understand that when picking a system they need to be looking at the RED lines above as this is the worst case scenario. Most will look at the green and white lines and choose the "better system" off that. It is obvious from the graphs that the separation between green and red lines increases drmatically with lower win rate systems and this is the reason you stated low win rates run higher risk of ruin. However, if you are lucky enough to trade only on the green line you will do fine with a low win rate. I do noy trade off luck so I prepare as much as possible for the worst case scenario.... The red line.
I agree, size should always be determined by the worst case, not by the best or even the average outcome. The reason is that underestimating the risk can be fatal, whereas overestimating it isn't. In the same way, passenger jets are designed with multiple failsafes, to minimise the risk of crashing. Engineers don't try to run a higher crash risk to boost speed or fuel economy by 10%.