What's wrong with this edge?
- Thread starter gnom
- Start date
What is the sample size?
What do you mean by manual?
How have you entered your orders? By pen and paper just looking at the information, or...?
If not what software have you been using to SIM this?
What timeframe?
Bit of a skewed risk/reward ratio. One stop out offsets five of those.......eh..............winning trades.
Speaking only on my own behalf, I'm more interested in making money than being "right". The latter is merely a by-product.
As someone else already pointed out this is a statistically viable edge provided your win rate remains above 90%. But this is only from the point of view of the profit factor.
From a probabilistic point of view, there is a small but always finite probability that in the future you will get a a streak of losers that will wipe you out completely. You can minimize that probability if you set your risk per trade to something like 1%. This in turn requires high capitalization.
Based on my experience, if you use this type of R:R there is a huge drawdown with your name on it coming your way, sooner than latter.
Let's look at this another way: do you wonder why everyone advocates a 2:1 or better skew? Do you wonder why everyone who has been at this game for 10, 20 years doesn't already do that? Do you wonder why all veteran emini traders don't simply scalp for +1 tick over and over again all day long?
You cannot average a +90% win rate on anything with any method or approach for one full year. Don't feel bad... no one else can, either. It's literally impossible. So the simple question you pose might as well ask about 100% win rates. Same chance of happening: zero.
Bottom line? Trading is hard work. Sometimes damn hard work... often just a little bit harder than the average person opts to deal with. The lazy part is physical, the hard part is mental. Quick scalps for pennies while risking big stops that "never" get hit is merely one of human nature's lazy ways of thinking. Works real well in many other aspects in life, does not work at all in trading.
Best traders in the world do not exceed 60% win rates (profitable) trades from entry to exit each event. Some skew that with scaled entries, other types of trade management blended results. But all-in and all-out trading for profits, best in the world do not average greater than 60% profitable trades over time, aka one solid year or more.
I agree with Austin and I usually have a 3:1 target or better unless I'm scalping counter-trend in which case it may be as low as 2:1. I really don't understand what kind of strategy requires a 1:5. It makes no sense to me even though it's a totally viable edge with a 90% win rate.
I always refer people to Geez' journal here. 2:1 profit:stop on every trade, with-trend trading, uses one monitor and a retail broker (no direct access), and produced a 150% return last year, and I believe is on track to top that return nicely this year.
I once tested in my sim account randomly buying or shorting a stock and using a 3:1 profit:stop and came out green. This was totally random, no chart analysis or waiting for setups.
I always refer people to Geez' journal here. 2:1 profit:stop on every trade, with-trend trading, uses one monitor and a retail broker (no direct access), and produced a 150% return last year, and I believe is on track to top that return nicely this year.
I once tested in my sim account randomly buying or shorting a stock and using a 3:1 profit:stop and came out green. This was totally random, no chart analysis or waiting for setups.
If you're going to trade with an inverted risk/reward ratio you had better be darn sure that your probability rate is achievable (9 wins out of 10 trades).
For the past two years I've traded with inverted risk/reward but did fine. Last year I had 69% winners with a +2/-3 dollar win/loss rate and my largest drawdown was double my biggest win. Money can be made despite inversion - I made it up on volume.
There's no one size fits all cookie cutter answer. If I had started a year with a losing streak, I'd have to tighten stops and scale back the size, adversely affecting my positioning. But I didn't and once I got up a bit, I was able to take on more positions and withstand some of those mini losing streaks. What I'd suggest is to see if you can tweak your system to reduce the risk ratio a bit even if it costs you a bit on the success rate side. While anything is possible, a 90% win rate is highly unlikely to be sustainable.