if you can choose of 2 systems of which the first one has a percentage profitabel of 67% and average winning trade : average losing trade is 0,86------and the second one is proftable in 50% of all cases and the average winning trade : average losing trade is 1,5 -----expectancy and the max drawdown in both systems are roughly the same , opportunity is roughly the same too in both systems .( all statistics are after slippage and commissions). if nothing in the statistic changes i prefer system number one , but that only a feeling that i cannot explain . has anybody a logical explanation why one system could be better than the other ??? good luck to all
The second system (50% and 1.5 ratio) is slightly more profitable than the other (67% and .86 ratio). However, it's close enough to be virtually meaningless in respect to other principles. For instance, someone might rather trade the 67% winner one - more winners is psychologically better for then in spite of the bigger losers. For me, it's better to have an even win/loss ratio if my winners are much bigger than my losers. Check your emotions. Also, there is a general theory (not sure that I agree with it) that says all mechanic systems have huge drawdowns. You are required to hang through the drawdown to eventually turn it around. So that's another place to do a gut check. Is your intestinal fortitude sufficient for any nasty periods one or both of these systems may have? One may very well have a worse period that the other. . .
All probability studies are based on the mean AND the standard deviation. Many people just ignore the SD but since you use stop losses, the SD is very important. When 2 systems appear identical, the SD can be the tie breaker. If you are playing directions (long and short), choose the one with the greatest volatility. Your stops will protect you from the negative side of volatility, but your probablity of getting bigger winners increase.
TGregg is right in one respect, you need to hang through the drawdowns of any system that you want to see benefits from over the long term. With the systems that I trade (and manage), I'm happier with a system that can produce winning trades 50% of the time as long as your (obvious advice here) losers are very short in time length and your winning trades are able to extend when moving in your favor. This is typically done with efficient trailing stops incorporated into the program. I stay away from systems that profess huge profitability, but occur due to a few "homerun" trades that are the bulk of the profits. When those big winners don't occur for any extended period of time, you end up in a large drawdown that usually weeds out the "would-be" long term holders of the system.
I would prefer the first system for psychological reasons. As TGregg said, the bottom line is not quite as good as the second system, but they are close. To me it's worth sacrificing a little of the bottom line in order to have the peace of mind that comes from a higher winning rate.
There is a risk of ruin formula, which unfortunately I don't have at hand. It is well known and utilizes win percentage and bet size. It is possible that one system might be traded with higher leverage than the other, with the same risk of ruin, and that would augment the profitability.