I would like some advice from any experienced traders out there willing to lend some time... When considering trading systems for development and backtesting them...what seems to be the better system to trade one that has a greater % of winners or one that has a better win/loss ratio?...It would be great if you could get the best of both worlds..though it doesn't usually seem to work that way
I would also like to add that I am new to system trading and have never traded a system live...so any general advice on system construction would also be appreciated.. thanks
Speculative systems require a higher profit/loss ratio to be considered successful. The big profits account for the entire profitability of the method. The small losses and small gains should offset each other. Arbitrage-trading should have a high percentage of profitable trades. There should be a majority of small profits and a minority of small losses and scratch-trades. That's how each should "look".
I think the following post answers your dilemma: http://www.elitetrader.com/vb/showthread.php?s=&postid=934531#post934531 A larger percentage of winners allows you to trade a larger percentage of your account with the same probability for a given drawdown. Obviously this needs to be calculated for your trading system / method. Next post includes a couple of forms of the Kelly formula: http://www.elitetrader.com/vb/showthread.php?s=&postid=938560#post938560 If you don't know what Kelly formula is, browse the Money Management thread from the beginning. On page 26 you'll find a few useful graphs, and on page 29 a drawdown probability table.
Read cnms2's reference threads. Many system traders seem to chant a mantra of big win/loss ratio NOT % winners. I think that this may be a reaction to systems with a high % winners that have been promoted by scammers or overly optimistic system designers, which had too small a profit factor after expenses and slippage. IMO, if you can have a reasonable profit factor (money won/money lost) or expectancy AFTER EXPENSES and SLIPPAGE then you will find a high win% system MUCH easier to trade than a low win% system. cnms2's thread gives you the maths for it but the experience that this translates to is easy trading vs learning to love (lol) deep drawdowns.
This is some good stuff...Thank all of you for your replies...its a good boost in the right direction....