Dear Community I need some help. I have been confused by those teaching that as trades you need to trade as much as you can when you see a setup which meets your criteria because just like the coin toss the more trades you make per week the more you will generally hit your win rate whereas by trading less you are exposed to more randomness and variance. I clearly under stand the science behind the law of large numbers and how with a coin toss you can easily get a streak of 8-10 heads in 100 throws whereas over 1000 trades the results will more even themselves out. I have a trading strategy which has win rate of 70% and a risk:reward of 1:1....Last Friday I traded 12 trades and lost 8. I was quite taken back. When I lost the first 4 my colleagues told me to stop as they trade using a 3 loss strike out rule per day. But my argument was that if I stop and more potential trades arise they could be the ones which end the losing streak and start a winning streak. Instead my losing streak tripled. I am at a loss because I trade less like 2-3 times per day then will I experience even more variance because like the coin toss I am doing a few trades or does whether you do a few trades or a large number of trades have no impact because variance and randomness will come knocking. Was keen to understand what peoples experiences are because it really shook me up as I thought winning 4 and losing 8 in a day is more akin to a system with a 50% win rate. I know high win rate systems are frowned upon but mine is 1:1 so if I risk $100 I win $100..not the high win rate systems that have terrible risk to rewards. Please help what should I do when my first 3 trades of the day are losses. Just stop and come back the next day. Although someone else told me that has no impact because trading sequences don't care about what day you trade. Thanks Kev
If your system is truly 70% win rate, then 1-1 is OK as long as your commissions and fees are reasonable. Given a robust system, it's correct that the more qualified trades you take, the better you will do. As far as the losses in a row, you will have them and sometimes outliers can reach uncomfortable numbers but that's trading. I have started many days with 3, 4 or more losses and ended up with a decent day.
Take all the trades that meet your criteria; don't take trades just for the sake of racking up a bunch of trades. If your "winrate" suffers, then re-examine the process you went through to arrive at your winrate. Look also at the data you used to determine that winrate. If, for example, the market you're now trading is different from that which you used to determine your winrate, that winrate is of little to no value. Ditto if you determined your winrate from trades taken at a certain time of year and you are now trading at a different time of year. Ditto if you did not sample different levels of volatility. And given that you're not allowing your profits to run, your winrate better be nailed down.
Excellent question qxr. The probability of a loss is .3, for 8 losses out of 12 trades, the odds are very low. So, make sure your win rate is correct. My win rate is actually less than 50:50 but I am happy with that rate because of R:R. With a win rate of .7, R:R of 1:1, OP's Kelly is ~.4. Which is an extremely robust number indicating your system is very robust and 8 losses out of 12 should seldom happen. If your win rate and R:R are correct, read up on Kelly to make sure your size of trade is sufficiently small to take care of unusual events like you described. Best wishes.
My question too. I look at mine using running window analysis over a 5 year period and they fluctuated/changed over the years.