I have just read an opinion piece stating that trading systems with profit factors below 2 are doomed to go bust, which has spooked me as mine is consistently around 1.37. I’ve been live trading €/$ for 4 months with an automated hedging grid and 3500+ trades later the account is 27% in profit, MDD 5.52% & PF 1.37. As a newbie I felt quite happy with those results until I started to read up on assessing profit & risk exposure.
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Use sharpe ratio to evaluate your performance, it can be done automatically if you link your account to myfxbook or other monitoring website.
Thanks Ontario - Sharpe is 0.08 & Sortino 0.09 but I don’t know how to interpret this because those values don’t look ‘textbook’ but the system keeps ticking over at profit. I’m wondering if the maths for these types of metrics is confounded because it’s a hedging system.
I disagree.
I’ve been backtesting and forward testing and what have you for 2 years now, trying to master the forex game. My most profitable strategy is a simple 1:1 risk/reward system with a 60% win rate.
If your win rate is about 50% or more, you should be fine.
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Thanks Joey that’s reassuring, currently running at 69.7%. But it’s only been 4 months on this system so lets see what regression to the mean looks like in a few more months, not counting my chickens just yet!
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Joey is completely right
the statement that a system or method with a PF below 2.0, without taking win rate into account, is necessarily going to turn bad, is just plain wrong
with a win rate of about 70% and a PF of 1.37, you have something very promising indeed, as long as that win rate doesn’t slip down too far
i’ve seen many long-term-profitable methods with PF’s around 1.5, and win rates lower than yours
trading frequency is also relevant, of course
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Thanks Flamingo - that’s good to know.
Or do it yourself by keeping track of your trades and see how you are faring over the years or since you have started. I have a simple journal for all my successful trades with Forexchief broker. That is the broker I recorded more success since I started using their platform.
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That’s the story! But as you mentioned 50% success ratio is mandatory in that case!
Variance of your trading returns is too high since sharp ratio is very low I would advice you to take more conservative approach in setting profit&loss target, like reducing R/R ratio or avoid volatility. What’s max drawdown in your trading history?
Thanks Ontario - Max DD is currently 5.52% after 3600 trades. Having looked at the formula for Sharpe’s I’m not convinced that it’s suitable for assessing the performance of the hedging system I’m running.
Hmm its very nice and safe drawdown I wonder why your profit ratio is still low. Maybe you cut your profit too quickly like expected return from the trade is low.
Yes the current parameters are definitely non-optimal, with low TP. I just wanted a fire-up and forget system at the moment that could garner a modest return with minimal intervention - hoping to have time to look at this more seriously in a few months.
Minimum profit of 1:2 imo
A system with a PF of 2 is 100% overfitted.
So it is exactly the opposite of the first post.
Lucky and overfitted strategies are very likely to blow going forward.
Robustness in inversly proportional to return
(or profit facor and other performance rates all dependen on return)
I have done many backtest with PF of 1.4 and 1.5 but in live trading there is neve more than 1.1-1.3.
I never found a long (3+ years) trackrecord with PF higher than 1.35.
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evidently you’ve confused “profit factor” with “risk/reward ratio”
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You’ve done an excellent work in 4 months. Congrat