Is it important to define your edge mathematically? If so, how do you go about finding one?

Tall Mike said:
Did you do a monte carlo sim for this? The charts are very helpful to see the #s play out visually.
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Monte Carlo simulation in Excel. The dotted arrow is your expectancy and the other series are simulations ran based on those probabilities. I'm sure there are better platforms that will generate it for you online these days.

Any trader that's trading for profit needs to understand the equation of expectancy and what's required depending on which realm you operate in.
 
I think risk of ruin calculation is the formula you need to define your edge. It pretty much covers all the metrics you need from EV, w/l %, pf, max risk.. just overall good summary into your system.
 
You study the market and find something that you can exploit for a probable profit.
..................... 55% of the time you have an edge.

If you bet on the direction a stock will go, cut your losses quickly and let your winners run, you have an edge.[/QUOTE]
[QUOTE="deaddog, post: 5815471, member: ....
%%
Good points but its not really a gambler s bet....................................
Edge differs also in farming / finance; farmers like to track hoe\ bull doze down edge; too much shade on crops:caution::caution:
 
hilmy83 said:
I think risk of ruin calculation is the formula you need to define your edge. It pretty much covers all the metrics you need from EV, w/l %, pf, max risk.. just overall good summary into your system.
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Based on my account since 2/20/23
using 20k account and risking 80% (margin call)

upload_2023-5-27_12-28-47.png


upload_2023-5-27_12-29-3.png


upload_2023-5-27_12-58-30.png


Somebody check my calculation but my risk of ruin (margin call) is nearly zero? What am I missing?

at 20% loss, it's still < 1% risk of ruin

upload_2023-5-27_13-3-49.png
 
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Tall Mike said:
Another question for you.

I don't have any experience in coding or backtesting.

Do you know if any sites similar to this where I can do some simple backtesting?
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Yes, it is all mentioned here on this website:
https://quantpedia.com/links-tools/?category=backtesting-software
Some are based on websites with clouding and no coding, others you need software but also with no coding here are offered too. Just scroll through and have a look which offers are most interesting for you as I do not know your custom requirements. This website has good overview what exists in the total backtesting market. It is really comprehensive. All you need is here.
 
Laissez Faire said:
Is that you, ChatGPT? :)

Win rate as an isolated metric is meaningless.

The only thing that matters is if your profit more than you lose and that can come about in very different ways.

High win rate strategies generally have an inverse R/R relationship as you'll risk the same or more than you win. In practice, this can mean periods of good performance, but where a slump in performance takes away a lot of prior profits as you simply lose a lot more than you win.

Lower win rate strategies generally have (or should have) a positive R/R relationship where you'll risk far less than you stand to gain.

Of course, optimal trading have a high win rate and a positive R/R relationship, but this is out of grasp for most and usually leads to disappointment where one could have actually been profitable if one accepted a lower win rate.

Risk 50/gain 150 with a 30 % win rate:

View attachment 315853

Risk 50/gain 50 with a 55 % win rate and you're not really going anywhere:

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Risk 50/gain 50 with a 75 % win rate and it looks better:

View attachment 315855

Now, most scalpers typically risk more than they gain to win, so maybe this is more realistic.

Risk 75/gain 50 with a 55 % win rate and your expectancy is negative:

View attachment 315856

You'd need a 70 % win rate with this R/R to just have a fighting chance:

View attachment 315858

With an 80 % win rate risking 75/gain 50 it looks pretty good. Now, can you sustain a 80 % win rate? Most can't.

View attachment 315859

The conclusion from my POV is that most people are better off making sure they as a minimum risk the same as they stand to gain, but preferrably make sure they only risk half of what they stand to gain. That way, you can succeed without always getting it right.
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Counter-intuitively, beginner’s would do better by focusing on lower winrate/higher r:r strategies.

1) It builds the skill of patience and discipline via making one more selective in trades.

2) It causes one to focus more on HTF’s

3) It’s more forgiving and easier to scale.

High winrate/low r:r demands high frequency/high performance and has a higher probability of leading to blowout/burnout.. Ymmv
 
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