Statistical Question

Discussion in 'Risk Management' started by Safetrading, Jan 11, 2011.

  1. I trade Crude Oil and recently came up with a new scalping method. With a little over 100 sim trades I have an 86.8% win rate. To do this however, my reward to risk ratio is 1:4 by the time commissions are taken into account.

    With the data I have, there must be a way to to determine the optimum number of consecutive winning trades to use for calling it a day, or another words that trading past X number of winning trades would be less profitable in the long run.

    I'm not very good with higher level math, if anybody has any thoughts on this it would be appreciated.


  2. NoDoji


    Am I reading this right - you're targeting X ticks profit and willing to risk 4X to achieve that? How many ticks are you targeting for a profit?

    Why would you do that on a trading instrument that provides many types of with-trend and channel trading setups throughout the day where a reward:risk ratio of 2:1 or better is not only achievable, but very likely?

    As for your question, if you have an 86.8% win rate, why not just put on as many trades as you can so you can manage to grind out a living with this high risk/low reward strategy?

    One last question, what time period do your 100 sim trades encompass - a week, a month...?
  3. Picking up nickels in front of a steamroller.
  4. rosy2


    search for hitting time algorithms or any stochastic calc tutorials.
  5. drcha


    I'm not sure this is the question you want to ask. The process you are following to trade does not "know" when you give up. Maybe what you want to know is what percent of your account to put at risk at any one time. Is that right?
  6. Thanks for the serious response. Sorry to give you too much info, but I will explain why I'm taking this unusual tact.

    In the past I have been an intraday swing trader. But unfortunately I have a chronic health issue now that leaves me in pain a lot of the time. Sometimes it is very little, which is easy to deal with, but it frequently peaks enough during the day that it will effect my trading. Basically it makes me lose my patience and I will take trades that I should not. When the pain increases it usually does so slowly and I can't seem to figure out myself how much is too much until it is too late. So the only way to get around this is to only trade when I feel fine.

    Well, with the setups I used to use I don't seem to come accross enough opportunities in the time I would have. I would frequently come back to my computer only to find out I missed them. So I came up with a scalping plan that will trigger almost every ten minutes or less on a 150 tick chart, and most days I can find 30 minutes where I feel fine, and that would provide enough trading opportunities for me.

    As to why not just trade as many as I can, it doesn't seem to be the best way to do it. For example, at a 1:4 reward to risk ratio, if I have 4 straight wins, and the next is a loser, I'm back to zero. With that in mind, I was thinking that 4 consecutive wins should be the point where I stop each day, even though my win ratio is 86.8%, regardless of if any losses occured or not, but I'm not sure that is solid reasoning.

    Lastly, the trades occured over a two week period.
  7. NoDoji


    Even if you had a 6 month sim history with that win rate, I'd be worried.

    Your reasoning indicates that you believe you can successfully pick and choose trades in a game of odds, and the odds aren't in your favor.

    Just my 2 cents: Trading CL this way when you go live will take you apart.
  8. It is very easy to design scalping systems with high win rate and high risk/reward ratio. They are artifacts of simulated trading. In reality they do not work because the other side (MM, fund, etc.) has more purchasing power than you. To make a long story short, these systems are a fantasy. No need to speak about statistics.

    I understand your medical condition. I have a friend who is in a similar condition to yours but he swing trades. He places the entry order and a OCO profit-stop order. His risk/reward is about 1:1.8. He never watches the PC screen.

    It is not that hard to find statistically significant crude futures systems for R:R = 1:1. See this for example:

    Good luck and good health.
  9. Thanks guys for the input. I don't have any live experience with scalping, only swing trades. I think I'll sit on my hands for awhile and look for another way to keep swing trading.

  10. lindq


    There is nothing that will predict your odds of losing or profiting on a trade after X previous trades.

    A win/loss rate is based on the universe of all trades, and has no predictive value of what will happen after X trades have been completed.

    It would be nice if it was that easy, or 'predictable'.
    #10     Jan 12, 2011