Dennis Gartman... GREAT Lesson In Trading
- Thread starter Scataphagos
- Start date
Excerpt from article:
Why Some Technical Analysis May No Longer Be Effective: An Interview With Michael Harris by John Navine
“There are still some chart pattern traders who claim that although most patterns fail if they can be right 20% of the time they can profit because they make on the average a lot more than they lose, i.e., the payoff ratio is high.
The first problem with this claim is that a low win rate exposes the trader to a large risk of ruin. Even when tossing a fair coin a long streak of tails is possible before the relative frequency starts converging to 0.5. Now imagine what can happen if the coin is biased 80% tails: a long sequence of losing trades is more than certain.
Then, a low win rate reduces the average trade, a metric often confused with the expectation, or mean of the distribution of returns. I show in my book that chart pattern traders with low win rate but high payoff ratio, must trade much more frequently than even short-term position traders. This in turn exposes them to higher probability of ruin and also forces them to look at many different markets, some of which may be too efficient or too illiquid for trading chart patterns.”
Why Some Technical Analysis May No Longer Be Effective: An Interview With Michael Harris by John Navine
“There are still some chart pattern traders who claim that although most patterns fail if they can be right 20% of the time they can profit because they make on the average a lot more than they lose, i.e., the payoff ratio is high.
The first problem with this claim is that a low win rate exposes the trader to a large risk of ruin. Even when tossing a fair coin a long streak of tails is possible before the relative frequency starts converging to 0.5. Now imagine what can happen if the coin is biased 80% tails: a long sequence of losing trades is more than certain.
Then, a low win rate reduces the average trade, a metric often confused with the expectation, or mean of the distribution of returns. I show in my book that chart pattern traders with low win rate but high payoff ratio, must trade much more frequently than even short-term position traders. This in turn exposes them to higher probability of ruin and also forces them to look at many different markets, some of which may be too efficient or too illiquid for trading chart patterns.”
Thanks! Nothing like confirmation. I’m AM RIGHT, I am brilliant and I am willing to admit my shortcomings. The only fault I have is I did not realize how “great” I really am. ROFLMAO
Win rate is one of the least important stats available. It correlates to one thing, a trader's ego. A misguided quest for a high win rate is deadly for newbies because it encourages all the wrong habits, eg cutting winners short and letting losers run.
For the vast majority of traders, the single most important stat is drawdown. You can tweak your other metrics by changing strategies, etc but you cannot walk away from a big drawdown. Legendary hedgie Steven Cohen supposed removed half his traders' capital if the hit a 5% draw and took it all if they hit 10%. Few of you who have traded any length of time could survive that cutoff. I don't even know if that is the optimal MAE for drawdown, but Cohen must have known that big double digit drawdowns are evidence of sloppy trading, like a drunk's car fishtailing all over the road. Sooner or later, he's going to hit the ditch.
For the vast majority of traders, the single most important stat is drawdown. You can tweak your other metrics by changing strategies, etc but you cannot walk away from a big drawdown. Legendary hedgie Steven Cohen supposed removed half his traders' capital if the hit a 5% draw and took it all if they hit 10%. Few of you who have traded any length of time could survive that cutoff. I don't even know if that is the optimal MAE for drawdown, but Cohen must have known that big double digit drawdowns are evidence of sloppy trading, like a drunk's car fishtailing all over the road. Sooner or later, he's going to hit the ditch.
So is a win rate of 20%. Sloppy fishtailing all OVER the place... guaranteed to end up in the ditch holding a pink slip...LOL.
win rate is the most important metric followed close by average win bigger than average loss followed closely by biggest win vs biggest loss followed closely by MAE and MFE.
Low win rate and probability of risk of ruin increases dramatically. Bingo.
The reason mr cohen was strict was probably because people get sloppy trading others peoples money.....
The argument for low win rate NOT being bad is predicated upon a lack of ability to devise a strategy and things of a tactical nature that WIN. It quickly becomes an excuse for failure.
Logically..who just wants to lose?? And then get “lucky” once in a great while. Sooner or later there will be a string of losses that decimates the account or evolves into revenge trading..or just giving up in despair. We humans are built to WIN.
Trading is one of the most highest performance activity a person can get involved in. Winning is everything. Winning isn’t everything. It the ONLY thing.
Logically..who just wants to lose?? And then get “lucky” once in a great while. Sooner or later there will be a string of losses that decimates the account or evolves into revenge trading..or just giving up in despair. We humans are built to WIN.
Trading is one of the most highest performance activity a person can get involved in. Winning is everything. Winning isn’t everything. It the ONLY thing.
Nobody is against winning, it's the definition I don't agree with. The definition being tossed around is a win/loss ratio regardless of drawdown on short term trades for capital gains vs the $us (or local currency), even if that's not explicitly what is being argued, it is implicity. Everybody wants to win if winning is defined as maximizing profit from trading. Thing is, those two things aren't equivalent, you'd think that would be obvious, but apparently not.
Last edited: