Quote from Gabfly1:
Hey, I bought the book and I don't regret it. I don't say that very often about trading books.
Mr. Brandt's reported performance over such a length of time is very impressive indeed. However, that does not mean I should suspend my critical thinking when reading his book.
Cool, and you're absolutely right. A suspension of critical thinking is never called for. You bring up some interesting points in this reply that are worth noodling over.
Quote from Gabfly1:
With this in mind, consider his argument on page 13, wherein he describes a casual survey he conducted among about a dozen or so consistently profitable professional traders. When presented with a choice, each of his "professional" brethren preferred to make a given return with a 30% trade success rate rather than with a 70% success rate. His argument is that there is no margin for error in the approach that needs to be right 70% of the time in order to produce its expected results. By his account, novice traders overwhelmingly choose the 70% approach.
I would characterize the argument a little differently. It is more that the methodology with the 30% hit ratio is going to be far more robust. It will be more armored against losses, since routine losses and aggressive risk control in respect to extended loss periods are already part of the program.
This 30% preference is also based on a rule of thumb awareness of how profits and hit ratios are typically distributed. In Stock Market Wizards, Steve Cohen is on record saying his best trader was only right something like 63% of the time. In other words, 63% is given as the high-end outlier among the sharpest group of short-term traders in the world.
Given the above, and given that markets have a historical tendency to distribute profits in a very "lumpy" fashion -- often rewarding a trader in a handful of great periods a year -- the lower win ratio also has a higher likelihood of robusticity in terms of conceptually fitting the profile of how gains are distributed.
To further back up the distribution argument, Kenneth Grant, author of "Trading Risk," was a risk manager for many of the top dog managers at one point -- Jones, Cohen, Bacon and so on. In his book Grant remarks offhandedly that the vast majority of great traders he worked with had a 90/10 profit distribution, meaning 90% of their bottom line profits come from 10% of their trades.
This in turn suggests a profile of boxing and counterpunching for very small amounts in play, then "pouring it on" in those isolated instances when all the stars align. And once again this is a 30% profile, not a 70%...
But to some degree the even more straightforward observation, which I agree with, is that newbies are routinely bamboozled by the notion of a high winning percentage statistic. It's not relevant to long run success and may even be detrimental if undue emphasis or leverage is placed upon it.
Quote from Gabfly1:
Although I don't exactly consider myself to be a greenhorn, I emphatically assert that I do not move in his lofty circles. Even so, I would take the other side of his argument. I would argue that the lower success rate has less room for error. Before going further, let me assure you that I am well aware the success ratio of trade entries is but one piece of a decidedly larger puzzle. I am also aware that newcomers tend to overemphasize this particular piece. However, even with all else being equal, I would prefer greater accuracy given the choice.
I would argue the cost of greater accuracy is a diminished opportunity set (relative to catching meaningful moves in deep and liquid markets with a meaningful amount of capital in play). This is because the biggest and most powerful trends are most often born in periods of high uncertainty.
How do you catch a monster move born in uncertainty? You take multiple shots with small controlled risk and lever up opportunistically as conditions dictate. The real world manifestation of this is a series of small, low-risk probe type opportunities coupled with the profits from major outlier moves.
I think one challenge for many new traders (not speaking to you necessarily at all) is that they don't give a lot of thought to how profits are distributed, or what a "loss" really means. By many professional traders' estimation, a small controlled loss is not necessarily a failure or a setback so much as an investment.
Quote from Gabfly1:
My reasoning is simple. The lower the success rate, the more dependent the trader becomes on any given profitable trade, because it represents a more important percentage of overall profitability. Therefore, for any misapplied would-be profitable trade (as we are all prone to do, which the author has himself demonstrated in the book), the opportunity costs are more significant relative to overall performance.
Yes and no. The question of dependence is debatable based on signal frequency.
For example, if you know from statistical records that you take 120 trades a year on average, you will certainly have a large enough opportunity set for the law of large numbers to work out in your favor.
Where N equals number of trades, lower average hit rate increases the odds of a dry spell for shorter periods of N, but as N extends, probability closes the gap.
Quote from Gabfly1:
As with the company whose profits are generated by fewer clients, a loss of one such client would more materially impact negatively on the bottom line than would the loss of a client to a company that has more paying clients. The company with a more diversified client base is more likely to have stable financial performance, all else being equal and apart from overall profitability. Similarly, my view is that the trader with a higher success rate, all else being equal, will have more stable performance.
The Bear Stearns High Grade Structured Credit Opportunities Fund had positive returns for 40 months in a row. Then it blew up. Vic Niederhoffer has had more than his fair share of 30 and 40 month net positive return months -- followed by repeated blowups. Merger arb guys are known for "eating like birds and shitting like elephants" or otherwise "taking their volatility all at once."
In other words, the flip side of your argument is that artificially high stability tends to sacrifice robusticity. There is the danger of the relied-upon mechanism that produces that stability suddenly going poof. The real world instances of this are legion.
I would further argue the client diversity argument is misapplied. The trader with the "steady eddie" methodology is typically relying on one strategy, or one market, or one prevailing set of market conditions. He is the one more exposed to potentially violent change.
Strategies with lower hit rates and higher R multiples, in contrast, almost by definition tend to apply a greater number of markets and a more diverse set of market conditions. Being able to exploit opportunities in 30 different markets is akin to having 30 different clients. Very different than the guy who makes all his money in merger arb, or day trading the DAX, or some other very narrow strategy as high hit rate approaches tend to be.
Quote from Gabfly1:
Did you notice how he would sometimes exit at his profit target well before the end of a move whereas at other times he would exit well before the intended target as a result of the price action dictating an earlier exit? Makes targets somewhat superfluous and even counterproductive, wouldn't you say?
Yes, I did notice that and I'm not sure why he uses profit targets. I'm not a fan of them myself, except on a fluid situational basis.
Quote from Gabfly1:
And so I say again, it was an interesting and thought-provoking book. I'm glad I read it. However, simply because Mr. Brandt has shown outsized returns does not mean that I should necessarily chew and swallow with my eyes closed.
I'm just saying. 
Of course. If I challenge someone's viewpoint or perspective, the idea is getting them to think more, not less.
