Consider These Two Trading Strategies...

[Visaria]

Strategy A has 60% win rate, 1:1 reward/risk
Strategy B has 40% win rate, 2:1 reward/risk

You can only choose one strategy. Which one do you pick?

 

[Martinsos]

I would say strategy B - reward is two times bigger while the probability of success is less than two times smaller. My total reward is (win_rate * reward), so B is better. Or am I overlooking something?

 

[nakachalet]

@Visaria

............................

so you are also a vendor, promotor, associate.... and what else?

LOL

good luck anyway trading comrade

 

[Visaria]

i'm none of these. also i'm not your comrade.

u r now on ignore.

 

[K-Pia]

Some parameters are missing.
Like position sizing
Max Drawdowns
...

Strategy 1
-> x*0,6 - x*0,4 = 0,2x
Strategy 2
-> 2x*0,4 - x*0,6 = 0,2x

In the long run they should deliver the same results.
But Strategy 2 has more room for black swans.
So Strategy 2 I'd choose

The greater the risk reward,
The more gains from an increase in P(Gains) and the more robust to a decrease in P(Gains).

 

[Visaria]

Yes, u r right that both have the same expected value, 0.2

However, position sizing is up to you. Which affects long run results...therefore in the long run, they will not produce the same results.

So bearing that in mind, would u still choose strategy B?

 

[K-Pia]

Yes, u r right that both have the same expected value, 0.2

However, position sizing is up to you. Which affects long run results...therefore in the long run, they will not produce the same results.

So bearing that in mind, would u still choose strategy B?

I didn't get your point.
According to the expected value,
You'd get the same return, leverage or not.

If you really have a 60% accuracy (S1)
Then you're allowed to leverage more.

But I'd still prefer (S2) because accuracy fluctuate.
It's more robust against adverse periods.
And you make more money when lucky.

 

[Visaria]

Assume no black swans etc. Assume the win rates are correct over 100 trades.

Would you use the same position size in both strategies?

 

[Xela]

Strategy A has 60% win rate, 1:1 reward/risk
Strategy B has 40% win rate, 2:1 reward/risk

You can only choose one strategy. Which one do you pick?

The first, of course.

Who's going to choose a 40% win-rate in preference to a 60% win-rate with the same overall return, given all the adverse implications for losing runs, losing patches and position-sizing involved?

 

[K-Pia]

Assume no black swans etc. Assume the win rates are correct over 100 trades.

Would you use the same position size in both strategies?

In this case. Become an economist. Not a trader. No I'd bet 5% with strategy 1 and 2,5% with strategy 2. But I tend to the same ROI with both. So I'd choose S2. You get the same for less leverage.