MY STYLE - BLOG
Several posts ago, I indicated that you can make money by coin tossing, which has a 50% success ratio by statistical probability. How does that happen? Smart traders always try to keep stop losses manageable and smaller than their profit targets. Effectively, your average win profit divided by average loss should be a factor of 1.5 or more, so that you make money. What this is means that for every losing trade your winning trades will make at least 1.5 times what you lost. On a win ratio of 0.5 or 50%, this will effectively translate to a win ratio of 1.25 in money terms across all trades.
(see the definitions below for the ratios)
So the question is, what is good ? Just a great absolute profit ratio in real money or also the trade count win ratio.
Here is where risk comes in again. Any trading system with a low win ratio will have a higher risk exposure, as the laws of statistics will work in the long run, but in the short run may expose you to significant draw down in a low trade count success ratio system versus one that has a high success ratio.
Traders are sometimes impatient people. And that is their failing. By trying to search for trades in every market move, one is going to add up to loss overheads without any significant gain. And yours truly also admits having fallen for that sometimes.
But here is what we have done now. We had a trade win ratio of 60% and a profit win ratio of better than 90%, but we were concerned with the draw downs on sharp market moves. So here are two things that we did, which others can also benefit from :
- Tweaked the systems that we use to push up trade win ratio to better than 80%. Fewer trades, but successful.
- Move to fixed reverse stop loss (if the trade does not make money, exit it at a predefined level).
Important observation was that none of this reduced the overall net profit capabili
Definitions : Trade win ratio or trade count win ratio = Winning trades / sum of winning and losing trades or all trades
Profit win ratio = Profit from winning trades/ sum of profit and loss from all trades.
Abnash Singh, Am a Trader helping small traders to realize their dreams.