Is Momentum Trading Inherently a Low Success Rate Play?

[catmango]

I've tried to devise some momentum swing plays, and they always seem to rely on a low success rate with the few winners carrying the majority losers. Is there such a thing as a momentum swing play that can succeed >50% of the time? I think that if I knew that by definition a momentum swing strategy relied on a few big winners to make it profitable that it would help me better approach my strategy creation.

Any input from my wise brethren would be appreciated!

 

[Diamondtrim]

Quote from catmango:

I've tried to devise some momentum swing plays, and they always seem to rely on a low success rate with the few winners carrying the majority losers. Is there such a thing as a momentum swing play that can succeed >50% of the time? I think that if I knew that by definition a momentum swing strategy relied on a few big winners to make it profitable that it would help me better approach my strategy creation.

Any input from my wise brethren would be appreciated!

I am pretty happy with my success rate. How are you devising your plays?

 

[pointrunner]

I've had some good results in increasing the success rate through better entry strategies (including additional filters) and profit targets as opposed to trailing stops.

Of course, there are always tradeoffs. A lot of strategies with lower success rates have a higher win/loss ratio and a higher expectancy. They could also come with bigger ulcers, too -- larger drawdowns, longer losing periods, more stress. Plus, your position size would often need to be smaller in order to withstand greater/more frequent hits to your account.

Additional filters (like waiting for only very strong trends or other confirming factors) increase your win rate, but lower the number of opportunities that meet your criteria -- so you might be trading less. This can also be psychologically tough for a lot of people.

Profit targets are more psychologically pleasing to a lot of people (and I wouldn't knock that -- helps with consistency). You might make less money overall, but you would also experience smaller drawdowns and can trade the strategy with less capital per position. Another giveup is watching the (increasingly rare) monster move continue to go in your favor after you're already flat from a target that's been hit.

I've learned (the hard way) that when people say that you gotta find what works for you, they really mean it -- both financially and psychologically.

 

[sunnyskies]

well ...

how do you find something that has a 70-80% hit rate and occurs more often than once in a year? u know what i mean? I havent been able to find something like that.

 

[pointrunner]

Quote from sunnyskies:

well ...

how do you find something that has a 70-80% hit rate and occurs more often than once in a year? u know what i mean? I havent been able to find something like that.

I know one trader (not me, and I'm envious) who does it intraday by watching a small handful of markets. The way he does it is by (1) only trading with an obviously strong trend, (2) achievable profit targets, and (3) using limit orders for entries so that the market has to come to him in order for him to get a favorable reward-to-risk ratio. He gets maybe 0 to 15 setups per day, but I'm not sure how many of those actually hit his entry order.

This is something most people find too hard to do, though. It means sitting on your hands for _most_ of the time, and even then being willing to pass on a trade because your limit order wasn't hit.

On an end-of-day swing trading basis, I've seen similar (although not as good) results by (1) waiting for a strong trend in a stock, (2) getting broad market and sector support, and (3) profit targets that are probably as far away as the initial stops (or even closer to entry than the stops). What it gains in hit rate it gives up in reward-to-risk ratio, but it's another valid approach to a positive expectancy imho.

 

[Trend Fader]

Quote from pointrunner:

I know one trader (not me, and I'm envious) who does it intraday by watching a small handful of markets. The way he does it is by (1) only trading with an obviously strong trend, (2) achievable profit targets, and (3) using limit orders for entries so that the market has to come to him in order for him to get a favorable reward-to-risk ratio. He gets maybe 0 to 15 setups per day, but I'm not sure how many of those actually hit his entry order.

This is something most people find too hard to do, though. It means sitting on your hands for _most_ of the time, and even then being willing to pass on a trade because your limit order wasn't hit.

On an end-of-day swing trading basis, I've seen similar (although not as good) results by (1) waiting for a strong trend in a stock, (2) getting broad market and sector support, and (3) profit targets that are probably as far away as the initial stops (or even closer to entry than the stops). What it gains in hit rate it gives up in reward-to-risk ratio, but it's another valid approach to a positive expectancy imho.

I agree it all balances out at the end. One approach is not better than the other. For trading purposes it better to have a higher win rate.. thus less drawdown and smoother equity curve. But for the investors its all about risk to reward.. because one huge winner can make up for all yearly losses and then some.

Also higher win rate usually means shorter duration because u are not lettting anything run in most cases.. which is good for turning over equity to produce more trades and churn out gains.

IMHO, if u really wana make a fortune in the market.. u have to look at it from risk to reward.. and pyramid into a huge winner for all its worth.. thats how you get rich. Trading is fun.. but rarely will you get rich that way... the big $ has always been holding for the longer term... especialy when u pyramid up a massive winner. The market will always give u a few of these stocks every year... finding them before theye explode is another story.

 

[catmango]

Quote from Trend Fader:

I agree it all balances out at the end. One approach is not better than the other. For trading purposes it better to have a higher win rate.. thus less drawdown and smoother equity curve. But for the investors its all about risk to reward.. because one huge winner can make up for all yearly losses and then some.

Also higher win rate usually means shorter duration because u are not lettting anything run in most cases.. which is good for turning over equity to produce more trades and churn out gains.

IMHO, if u really wana make a fortune in the market.. u have to look at it from risk to reward.. and pyramid into a huge winner for all its worth.. thats how you get rich. Trading is fun.. but rarely will you get rich that way... the big $ has always been holding for the longer term... especialy when u pyramid up a massive winner. The market will always give u a few of these stocks every year... finding them before theye explode is another story.

That's funny that such a quote would come from someone named "TrendFader"!