What's wrong with this edge?

Discussion in 'Trading' started by gnom, Apr 26, 2010.

  1. gnom


    If I set fixed target let's say .20c and stop at $1 I can hit 90% win rate. But this is such an opposite from "cut your losses short and let your winners ride". So what am I missing?
  2. blox87

    blox87 Guest

    For every 9 winners you have you will have 1 loser that wipes your winners. profit clean. That Risk /Reward is usable but you have to be right at least 95% of the time. Try a 1:1 Risk /Reward and focus on being right at least 50% of the time. 1:1 1:2 and 1:3 is what I use depending on the setup .... my 2 cents.

    You better be on sim right now and not live if you don't want to donate your money to the veterans .
  3. nothing.

    but you'll get sick of wiping out your week's worth of gains in one day.........over and over again.
  4. u21c3f6


    Nothing IMO.

    The trick is: can you actually do that? If so, you got a money maker.

  5. NoDoji


    This is a statistically viable edge indeed, but I'm curious what kind of trade setups encourages the use of a 1.00 stop for a .20 gain.
  6. Puretick
  7. Can you stomach the inevitable streak of 10 losers in a row? Then you need 50 winners to get back to even. If your average profit target on 20 cents is $100 (500 shares) then you'll have to be able to sit through a 5K drawdown while making money back $100/time.

    I'm trading right now with slightly inverted risk/reward (albeit, I've been getting beaten up lately, but for other reasons), so it can definitely be viable.
  8. How do you *really* know that it's a 90% win rate? This isn't a game of poker where the percentages are fixed, this is a completely different beast. It really depends on how accurately you have defined all the variables in your system and figured out how their probability distributions, etc, and even then it doesn't guarantee anything going forward.

    All you know is that 90% of the time in the past, based on the variables that you have defined, you saw a favorable outcome.

    As someone else mentioned, what about when you hit a really terrible streak of losses. I have a system that I'm trading that in January had a statistically improbable streak of bad luck (worst results in over 3+ years of backtesting data). In 2 weeks, I went from around break even to a 25-30% drawdown. Basically the market changed on me just as I went all-in thinking everything was okay.

    The problem is money management, and I think a 1:5 win/loss ratio won't hack it in the real world. It might work in a game where all the variables are fixed like poker, but not in the stock market.
  9. gnom


    If you make 50+ trades a day then who cares if you have a bad day and lose 5K, next day you might have the opposite.

    All I'm saying that certain things happen more often then not in the market but do require wider stop. Everybody is going after 2:1-3:1 risk to reward ratios, why not try something different? Was wondering if anybody have success with this?
  10. What is your sample size and what dates are you deriving this information from? What instrument is it?
    #10     Apr 26, 2010