Profit Factor for different % targets

Discussion in 'Risk Management' started by kidPWRtrader, Aug 8, 2010.

  1. I have been toying around with my system which is largely trend following. My accuracy to t1 is in region of 48-57% depending on some factors for my main setup. For the same setup the accuracy to t1 is 23-25%.

    In the past, I have let all my plays run to t2, but now I started to re-examine this and think in terms of profit factor. Sometimes the r/r for t2 is much greater than for t1 but sometimes it isn't THAT much greater.

    Now, I do sometimes have t3s that are very big lotto plays, but their accuracy is even lower (~15%).

    Recently I started to play around with the idea that my profit factor to t1 should be 2 but to t2 should perhaps be 3 if I wish to carry a large portion of position past t1. This is due to a psychological preference for accuracy, I am putting a premium on taking a lower accuracy play. And to take a play I must either have profit factor 2 to t1 or 3 to t2.

    Anybody who approaches the market for exits in a scaleout methodology have any input on this?

    My r/r to t1 is anywhere from 1:1-3 r/r on average and to t2 is usually from 1:3 --> 1:10 depending on the price action (not sure what the mean is).


  2. In case anyone is interested, I established an approach where I always scale a minimum of 1/3 or 1/4 @ target 1 (and a maximum of closing the position) and I carry the majority of the position into T2 if T2's profit factor is at least 1.25*PF of the Target 1. Im letting 25% be the premium for lower accuracy. The minimum PF for me to take a trade is 2 for t1 and thus, 2.5 for t2.

    This allows me to carry the runners when it makes sense on the bottomline dollars...
  3. What is your definition of "profit factor"?
  4. Average Win Gross/Average loss Gross
  5. That is NOT the definition of profit factor. If you would like to properly communicate with other traders it is better to use standard definitions.

    profit factor = sum of winning trades/sum of losing trades

    Otherwise you are risking not being understood by others.
  6. For what I needed, it was ok to standardize it since my risk is always 1% the profit factor becomes

    (%win)(R/R to Target 1) / (% lose)

    Hope this clears things up. Just was looking to share ...