Quote from oldtime:
It should be relatively easy to compute the win rate of the New York Yankees. So armed with that information I should be able to make money betting on them or against them. All I need to do is overcome the vig, and that could easily be done with a little martingaling.
What is a win rate anyhow? How do you compute it? If I bet on heads and the first ten flips are tails does that mean my win rate is 0%?
Win rate over long periods of time may not do me that much good because I may not have enough money to bet over a long period of time, or I may simply not live that long.
So what good is a win rate?
As Volente said, an average win rate is determined within the framework of a risk:reward ratio, and as you point out above, the account size/time window are also important.
In a fair coin toss (the coin is balanced and released the same way every time), let's say you've determined through extensive research that every 100 tosses, the win rate for either all heads bet or all tails bet averages 50%.
To bet profitably, you need an edge. With a 50% win rate, you need a risk:reward edge. If you bet $1 on each toss, but win $2 above your initial bet for every appearance of heads, you have a significant edge and should end up quite profitable over time.
If it takes 15 seconds for each toss to be completed, you have plenty of time to bet, but you only have $10 in your account, you can quickly lose everything despite the favorable edge.
If you have $100 to bet but can only play the game for 5 or 10 minutes of each 25-minute/100-toss session, you can also lose everything despite the favorable edge.
Successful trading involves a combination of factors, all of which need to be researched and incorporated into the business plan:
Win rate + R:R of a setup or group of setups that produce a favorable edge over each time period X (sustainability of the above through varying market conditions - bull/bear, trend/range, orderly/volatile - may also be a key factor depending on the nature of the strategy)
Capitalization necessary to continue doing business long enough to benefit from the favorable edge
Ability to trade every appearance of the setup(s) and manage each trade according to plan so as not to dilute the favorable edge
It's like any business, requiring market research, development of a viable business plan, proper capitalization, and adherence to the plan.
Another key ingredient, often overlooked, is ongoing analysis of results and ongoing research to help recognize, early on, changes in the business environment that may require changes to the business plan.
An increase in raw material costs will affect profit margins of a manufacturing business; the business will need to increase the selling price of its products to ensure profitability.
An increase in market volatility will likely result in the need to increase the size of a trader's average stop loss. The trader who then takes advantage of this market volatility by increasing the average profit target accordingly has a much greater chance of remaining in business.
