Quote from logic_man:
I guess I'm not sure why a strategy would have to have a low(er) winning percentage in order to successfully trade multiple markets, though. I definitely see the potential for a high winning percentage strategy to be quite difficult to take out of its original context, if it has been optimized, but it would seem to me that the logic of trading any liquid asset class, at an abstract level, is the same. That's more of a hypothesis than something I've empirically proven, though.
Well, I'm not arguing a lower winning percentage is a necessary condition for success -- more so that it's a very regular occurrence. One could have a high hit rate for an extended period of time, and one of the large global macro traders in Invisible Hands says his long term hit rate is 50%.
The abstract logic goes back to near term uncertainty, probing bets, and the way profits are typically distributed.
If you use a tighter risk point, you can establish a position with larger size. But doing that increases the likely number of times you will have to test and probe before catching a meaningful move. Outlier profits then come on moves that are extra large, or offer high quality pyramiding opportunities, or otherwise provide the perfect moment to go "balls to the wall" with tightly defined risk.
Quote from logic_man:
Since you seem to have some fairly strong opinions and experience on the matter, though, I'd be interested to know, for example, what you think the "maximum" winner to loser size ratio would be for a strategy which was profitable on ~63% of trades (as per the Cohen quote you mentioned above) versus what you think traders with ~30% profitable trade rates can "max out" at.
Well, that's the beauty of being a discretionary trader -- there really is no maximum to speak of, any more than there are maximum earnings for an entrepreneur.
Let's say a trader is able to maintain a 63% hit ratio through extreme precision and tight risk control, but is also very, very good at spotting those rare outlier moments when all the stars align for a huge trend.
Then say that trader establishes a huge position in Ford (F) at ~$2 per share in early 2009 and, thanks to a cushion of accumulated profits, decides to open up his risk envelope, riding it all the way to $13 per share. What would his R be if he originally risked 20 or 30 cents on the trade?
There are also other ways to structure trades as such that, in certain circumstances, an outlier R can approach 50 to 1 or some such (or even a lot more). So it doesn't really make sense to talk about a cap or a max, assuming the versatility is there.
Of course, I am talking about discretionary methods here rather than mechanical (or discretionary implementation with mechanical augmentation). But this also helps explain why the most profitable traders in the world are discretionary.
