Dear babypips members,
I’m relatively new to trading and am trying to understand some trading formulas here. I understand that in order to be profitable as a scalper, day trader, swing trader, or investor, etc. you need to have a positive profit factor because mostly “everybody” knows that it is impossible to be profitable 100% of the time. This is why in my opinion people need to understand about having a postive profit factor metric. Having a positive profit factor is hard, but having a set of strategies or systems or even just one with a positive expectancy can help you achieve a positive profit factor. For example, I understand that Warren Buffet the investor has a positive profit factor because he makes more money than he loses. Buffet’s edge is buying when stockholders sell too much of their stock creating an opposite effect of the bubble mania phase. A depression phase if you will. His system of determining intrinsic value is his system or tool that allows him to be “consistently” profitable, as being consistent is the goal if you want consistent results. Nobody can win forever and just having a slight positive expectancy is all that one needs be profitable. Anyways, I understand after reading the book titled The Art and Science of Technical Analysis by Adam Grimes risking a fixed percentage per trade is better than risking a fixed monetary amount because you will lose less on losing streaks and gain more on winning streaks. My question after all this writing is does the distribution of wins and losses matter when trading? Let me elaborate, assume we have a trading system that wins 50% of the time 100% of the time so that after a series of 100 trades the system is gauranteed to win 50 trades, but no more and no less. The same is for losses at 50%. Lets also assume that the risk to reward ratio per trade never changes and is fixed at 1:2 where you gain 2% per trade won and lose 1% per trade lost. Finally, assume the trading account has a balance of $100 for simplicity. After some math ((1.02)^50)($100)=$269.15, ((.99)^50))(269.15)=$162.84. Lets ignore digits at the third decimal placement or after the cent for further simplicity. Finally, my question after all this background information is will the result always be $162.84 no matter the order of distribution of wins and losses of a trading strategy or system that won 50 trades, lost 50 trades, and had a 1:2 risk to reward ratio with a fixed percentage risk of 1% per trade? Will it always be the same if say the trading strategy won the first 50 trades in a row and lost 50 trades in a row after yielding a total of 100 trades or, if the trading strategy won 10 trades in a row than lost 30 trades in a row, won the remaining 40 out of 50 winning trades in a row and lost the remainder 20 out of 50 losing trades in a row for a grand total of 100 trades yielding the result of $162.84?
Thank you so much for your time into reading this and will appreciate any response to my trading dilemma !