Quote from mrpace:
Is it then next to impossible to come up with an effective real world system that takes advantage of high win % and low win/loss ratios?
Not impossible but not easy either. Essentially when you trade one of these types of systems you become a scalper. Yes you may have the ability to automate your system. However if you are not manually making sure all is going according to plan then I can't see how a system with such a small positive average trade (if the avg trade is in fact positive) can make out. You will have the missed entries, and you will also have the missed exits. Missed entries are easier to deal with. You simply have no trade. Missed entries will reduce your system's profits and further reduce your system's average profit which is already vapor thin.
Missed exits require a specific set of rules to be implemented. Essentially it is a money management routine, and as such warrants backtesting to see if implementing it degrades the system's performance. As the ES is a noisy instrument it isn't unusual for it to hit your exit price, retrace back through your entry price by a certain amount, and then finally trade through your exit price (all on the same 1 minute bar). So how does ESignal's backtesting engine score that one? Is that a small profit (assuming you could get filled), breakeven, a loss or a profit at your profit target? Your choice of MM rules will determine which is correct, and a backtest of those rules will show what they do to overall system performance. The bad news is that you won't be able to do this type of testing on 1 minute bars. As Mr. Sub has suggested, you will need to test on T&S data.
And as has been pointed out by others, your system might not even be profitable because the assumptions used in testing might be overyly optimisitc. So that vapor thin $4.67 avg trade might turn into -$5.0. So likely this particular system is just a whole lot of churning, and not much earning. Don't feel bad, I've been there and done that countless times over.
Typically, high winning percentages and low win/loss ratios are indicators of a system that holds for only a very short while, and a system that will be quite vulnerable to slippage.
So, to ask a stupid question, how do scalpers do it? Are there no ultra-short term ES traders out there? (another stupid question)
I can't speak for others but the "secret" is really in keeping loss sizes small and having a particular trade setup edge that allows you to enter when the market has a high probability of moving in your direction (at least a little bit), and having superior trade management skills so that you protect your profits, minimize your losses and squeeze every ounce of profit out of your winners. In other words it comes down to the same thing that makes traders who trade on longer timeframes successful. You must find a way to turn the risk/reward and win% picture in your favor. And as some have stated in other threads, you don't necessarily have to have a high win % in order to scalp profitably. A 2 to 1 reward/risk ratio with 50% wins is a very good system regardless of whether it is a scalp system or a long term system. But these systems don't grow on trees.
Play around with the equity curve simulator on the following site - there are many roads to profits:
http://www.hquotes.com/tradehard/simulator.html
And one final bit of editorial. The average trade statistic is one of my favorite system statistics. I routinely discount backtests that do not give an average profit of $25. Once you take care of commissions and slippage and no fills, etc., you might have a profitable system if it starts out with at least that amount. There are just too many things that can go wrong with a marginally profitable system in the actual execution to bother with them.
