Which setups are more attractive?

Discussion in 'Risk Management' started by elitetradesman, Oct 15, 2012.

  1. Consider two hypothetical setups. One setup has a winning rate of 55% with a potential profit of $433 and a potential loss of $407. The other setup has a winning rate of 10%, a potential profit of $1000 and a potential loss of $50. Both have the same expectancy at $55.

    Which setup do you find more attractive and why?
  2. 2rosy


    use options to construct a spread so you have better odds
  3. the1


    Both would yield identical profits over time so picking one over the shows no advantage.

  4. I'm going to take the other side.

    The first setup with the higher win rate will have much milder equity swingz for the same expectancy, therefore the position size can be higher for the same max drawdown.

    This is just my hunch, of course, as no statistical distribution actually exists that would allow me to prove this mathematically.
  5. in theory it's an easy choice: profit factor of 1.30 vs 2.22.

    the second setup may have the same returns expectancy but standard deviation is lower, average drawdown over time will be lower, etc.
  6. jb514


    I agree based on my poker experience. I think the first will have less swings meaning you can bet much bigger.
  7. Bob111


    one that you comfortable with. if it's setup for stocks-i would pass on 10% one..cause most likely you will miss the wining entry.. for various reasons. and once you miss it-you will be f**d..both financially and mentally. don't worry about losses-you can't miss those :p
  8. If both have equal positive expectancy, trade both setups.
  9. Unless we are talking about a robo trader (which I know exist, but are few and far in between), you obviously want to be trading the higher accuracy setup.

    Please do yourself a favor and run a monte carlo on 10,000 trades and see if you feel comfortable taking 50 losses in a row.

  10. Thanks. I liked the first setup as well, but just couldn't put my finger on it.
    #10     Oct 17, 2012