The fact that you are risking ONLY 0.1% of your acct on this terrible a win rate means that you will have low risk of ruin....THAT is your money management (position sizing) that is keeping you alive. However, if you only risk 0.1% you will also have low profit and it will be hard to beat the market...NOT impossible but HARD. Your profit factor of 1.1 is saying the exact same thing I pointed out in detail on my prior post. The point is NOT whether the system is profitable or not! The point is wether in REAL WORLD trading will most of us be profitable with such a system of low probability? The answer to that is definitley NO in my opinion. I know that after 20 losers in a row I would definitely question my system and I would probably LOWER my risk per trade because I would be gun shy knowing I just lost 20 in a row!! Now when that winner of 13R comes (to even things out) I would win less because I risked less. Then you go back to risking more per trade and guess what 90% chance your a loser AGAIN. Maybe you dont need to "read a book" to know this "simple math" but have you done a MC Analysis on this system? I suspect not. Do it and make up some numbers and you will see a 10% win rate is terrible and not worth trading. Throw darts at the board or flip a coin and you will be better off with good money management skills.
You missed the point. I used extreme examples to illustarte the irrelevance of win rate as far as ruin. Ruin depends mostly on money management given a positive profit factor. Profit depends on frequeny of trades. Some trend following funds with many years of positive perofrmance have 10% - 20% win rate because they get many small losers and a few winners that last for months or even years. If you are talking about scalping or day trading then I agree that win rate is important in some cases. But unless you restrict talk to those styles, it is not and every experienced trader and his dog know that.
I do NOT scalp or day trade. I swing trade and it IS very relevant!! I will post up MC Sim of trades soon for you to see what I mean. These trend following funds that have months or years of wins show exactly the same thing as I mentioned before....you need VERY LARGE Profit on small number of trades to make up for multiple losses. I think you missed the point in that it IS relevant to ruin. In my next post I will post up MC Sim to show you and others to make it more clear. I am NOT looking to argue,...just trying to educate some of the people here to understand money management and stats of trading to better grasp why they may have such wild swings in their acct. USUALLY if you reduce your position sizing (risk per trade) you will greatly reduce your chance of ruin or AT LEAST have a slower bleed to your death.
OK,...here is a MC Sim for 2 different systems. BOTH systems will have a 0.4R Expectancy and assume a starting capital of $100,000. The first system has a win rate of 10% and the second 90%. These are the ONLY differences in the systems. Both MC simulations are done and posted below. Both simulations are of 200 trades simulated 10,000 times!!! This is 2,000,000 trades. Both MC sim are done using ONLY 0.1% capital at risk per trade. Notice that this is considered EXTREMELY conservative by most standards as most would say 0.5-2% risk is typical for trading. The ONLY reason I have included this 0.1% risk MC Sim is to show that at 0.1% capital at risk you could still have significant draw downs and wide possibilities of outcomes in trading with a 10% system. This 0.1% was also the amount of risk that intradaybill mentioned in a prior post as if that is somehow going to prevent draw down. It does not. It only reduces the rate of bleed and possible ruin. Realize also that everyone has a different definition of ruin. For me 20-25% draw down I would consider ruin. For others this number may be 50% or 100%. Everyone has to decide for themselves what that number is. Notice that the 10% system has a PEAK of $37,000 GAIN and nearly -$12,000 LOSS. Also notice that the longest string of losers is 33!!!! The longest string of winners is 2!! NOTICE THAT AVERAGE WIN WAS $9500 OVER THE ENTIRE SIMULATION!!!! THIS IS IDENTICAL TO THE AVERAGE WIN FOR THE 90% SYSTEM. (sorry about the ALL CAPS,..I can not figure out how to bold something here..LOL) Compare that to the 90% system. Peak win is certainly lower but so is the peak draw down. This system has a max Draw down of -$370. Also notice that ALL of the simulations produced a NET profit even the MINIMUM profit was $7,000 (7%). Point is that the 90% system has less draw down and ZERO possibility of ruin and 100% chance of a winning year. The obvious question is now for the 90% system with ZERO chance of a losing year am I risking too little per trade? I would say the answer is YES. You could do MUCH better with this system by only changing the amount risked per trade. Lets see what happens with 1% at risk,....to be continued below. First pic is 10% system at 0.1% risk.
Ok so now lets look at the SAME systems with a 1% risk of capital per trade. Again lets assume a $100,000 starting capital. Again 200 trades simulated 10,000 times. Notice that now the risk of draw down goes up even with the 90% system. However, also notice that in the 90% System the MINUMUM is still a $50,000 Win. Thats 50% folks!! Nothing to sneeze at as a MINUMUM win. MAX is $103,000. This suggests that even more risk could be taken with this system and maximize gains. Notice that the 10% system has a MAX Draw down of $101,000!!! YIKES!!. MIN P/L with this system is -$100,500 LOSS!!! That is complete RUIN by anyone's definition. I do realize that the MAX Gain is higher with this system but that is only because of the higher profit of the winners when they occur. This is the same a intradaybill was describing "Trend Following Mutual Funds" that have trades that win for months & years (large R gain) for MANY small (1R) losses. Again the AVERAGE win for BOTH systems is about $80,000 (give or take a little) So,...Probability of win IS RELEVANT!!! Realize one last thing that ALL MC Sim assumes the trader will trade the system EXACTLY the same as when the stats were collected and that the stats are a good representation of the market that will come in the future. It also assumes that you will trade it 100% mechanically and that your emotions will not falter. I dare say that anyone's emotions would come into play after a string of 33 losses with the 10% system. So your results will likely be less than the MC simulation. So with a 90% system you have room for error,...NOT SO MUCH with 10%. I hope this clears things up a bit....Good Luck! 10 % system at 1% risk
FWIW, my highest profit factor very long term trend following methods have 2%-6% win rates. Typically, trendfollowing=low winrate, mean reversion=high winrate
I trend follow as well and my win rate is 60-70%. It just depends on which trend you are following...micro trend, short term , intermeditae, long term. By looking for shorter term trends I tend to increase my chance of win and overall my system has become exponentially better. I used to trade weekly trends but now I trade daily and 60 min trends. The longer the trend the more there is a chance of reversion to the mean (at least that's what I have found). That eats away at profits and triggers stops more easily. Just my 2 cents.