I have no dog in this fight and I am not choosing sides.
To be fair to schweiz, he did say his trend following system had good win/loss but not high (< 100%) win rate, so whenever he incurred a losing trade, he switched over to his "recovery mode" which had a very high win rate (~100%) but low win/loss ratio, this, until he recovered his losses then he switch back to trend following. This to me is his key contribution to this thread.
To me his suggestion of reducing risk when one has a losing situation by switching to a lower risk higher probability approach is worthy of my consideration and I thank schweiz for his suggestion.
The idea sounds really good, and I can't fault the idea, but how does it work in practice? Sure, take a trade, risk 3 points, hope to make 10, and if you don't make 10, switch to another strategy. This new strategy though, since its making smaller gains, has to have a much higher win rate because you gotta roll the dice a few times and be right. It begs the question though, why not start with the strategy that already has a very high win rate?
His suggestion that commissions is a factor is total bullshit. Commissions are only a factor for those who hope to make the spread, which hopefully nobody is trying to do anymore given HFTs and algos, or if your edge is so bad that commissions do actually make you go from positive to negative.
Lets run the numbers. 1 ES contract, per round trip, is usually in the order of $4 and change. Since 1 ES tick is $12.50 profit, it means that your commission is only 1/3 of a tick. If you can make 1 ES point, $50, with an almost 100% win rate, does losing $4 really matter that much? Do you really stop trading a system that gains you one 1 point because you don't want to pay $4 and pocket $46? If you're trading 10 contracts, not an unreasonable number for an experienced trader, this is $460 profit each time you put on a damn trade. Who is going to complain about commissions when making this much money?
Now you might say that trading 10 contracts is stressful, and sure it is, because most know that they are no where close to a 100% win rate. But how stressed out can you be if this is your win rate? You're only stressed out when you know you don't win 9 out of 10 times.
Perhaps the trade isn't 1:1, so when he loses, he loses more than the 1-2 ES points that he gets when he wins.
Lets some some simulations. Here it is, assuming a 90% win rate, taking into account $4 commissions, and using a simple 1:1 trade, making or losing 1 ES points, hence $50. People would kill for this equity curve.
Ok, lets make this a bit more challenging. Lets now say that when he losses, he loses $200, so 4 ES points. This should be an exaggeration because his trend system has a 3 point stop he says, so using a 4 point stop is silly, but still, lets run it.
Notice that running this simulation 200 times, the lowest PnL is still over 1k. So even this is still profitable.
So you see, the theory of what he says sounds great, but in practice, there are some huge limits that need to be overcome.
A rule I go by is that when anyone has extraordinary claims, its very important to be able to back them up. Unless he can, which he has already said repeatedly that he won't, don't put too much effort into following his "advice".
Edit: Perhaps if he comes back to say that the almost 100% win rate does sometimes suffer a 10 point stop, well then, this is a very important clue that blows it all apart.
