# Which system would you pick out of these?

Hello traders, I have a question.

If you had to pick a system with the following results which one would you pick?

A) 90% winrate with 0.3x gain per winning trade
B) 30% winrate with 5x gain per winning trade
C) 40% winrate with 1.5x per winning trade
D) 70% winrate with 0.4x per winning trade

How can anyone possibly answer this without knowing the trade-frequency of each system? Youâre surely not asking us to imagine that they all have the same number of entry opportunities?

2 Likes

Yeah, lets say that you get 1 trade per hour on each of them and every single one is the same

2 Likes

Ok!

And by the way, welcome to the forum (sorry, have only just noticed that the OP was your first post here).

The arithmetic is very easy, but that isnât really what these situations are about, at all, is it? So âŚ letâs look at 10 trades of each system, each with a position-size of 1 unit (and then there are 10 commissions to pay, to be deducted from the figures shown below in each case).

Wins 2.7 units, losses 1 unit, balance +1.7 units

Wins 15 units, losses 7 units, balance +8 units

Wins +6 units, losses -4 units, balance +2 units

Wins 2.8 units, losses 3 units, balance -0.2 units

So, we exclude D from our consideration, because it has a negative expectation.

Then we look at the other three, which appear profitable, and see that B is enormously more profitable than either of the other two, and then from there, we each make our own decision in the light of the win-rate of only 30%.

Some people are very put off by this; others are not.

I am put off, because the losing runs will be overwhelming, and my position-sizing will have to be really tiny, to allow for that.

It isnât just consecutive losers that are the problem, naturally.

Itâs all the other times that you win some and lose many and win one or two and lose many more and that keeps on happening, apparently without end, and you donât know where you are, and you donât know if your system has stopped working or not.

This is soul-destroying and panic-attack-provoking and all the rest of it.

And if you want to avoid that, you choose system A, where youâll never have big losing runs and can use a decent position-size and still sleep at night.

I choose system A.

Most people will choose system B, of course, because its âexpectationâ is 4 times as high.

Which do you choose, yourself, @krecon ?

2 Likes

Same.

One of them is losing and two of the other three have nasty win rates.

A is profitable and has a great win rate. It doesnât matter that B has four times the expectation, because it isnât realistic to trade with a 30% win rate unless you have hugely deep pockets and ovaries of steel. Just use A, and do it with bigger sizes of trades, if you want it to work out as well as B apparently does.

1 Like

Thank you very much, I would probably pick B but I would first learn to handle losses

With respect, you would undoubtedly be far better off choosing A and learning to handle position sizing instead. Thatâs dead easy by comparison: none of us is great at handling losses.

A is just as profitable as B if they really have the same frequency as you said.

But welcome to Babypips.

1 Like

A is unattainable (without a form of trade management)
B is unattainable
C is exactly correct. Profit Factor of 0 though.
D is also correct. Profit factor of 0 again.

I would obviously pick A or B but both are only possible by risking more with proper management.

3 Likes

Hi Krecon, and welcome to Babypips. My intuitive answer was B, but I am glad I read Pipsteroidâs answer before I wrote this. His rigorous analysis supports my âgut responseâ. I think it is important to put this answer in context. To date my trading life has involved less than 3.5% of our net wealth, yet has now contributed around 8 to 9% of our last four years âprofitâ. So in context, I would never bet the farm on a pursuit that was planned to deliver what many think unachievable.

In fact, the TRADING component of my crypto portfolio has a more outrageous potential outcome than B, but with an expectation of less than a 1% probability of achieving it. Only time will tell, but the constituent parts of this very small part of our trading portfolio are chosen to be âcrypto currencies that could, in theory deliver a 100X but are very likely to fall to zeroâ. We have moved in one year from a total of three participants in this part of our portfolio to more than 30 components. I am not disappointed with the 2024 results to date though it is still too early to tell.

3 Likes

Sounds like a swing strategy. Iâd choose this one.

Basically, you lose three 1% risk trades (3%), then you 5x your risk (5%). That leaves you with a 2x profit. Not too bad.

âIf only.â

Thatâs how a 30% win rate âsounds as if it ought to work.â

It doesnât, though.

What actually happens with a 30% win rate is that you have times when youâre 50 trades down, on balance. And the first of those times comes round more quickly than you hope.

B is no more profitable than A, if you do A with bigger sized trades.

3 Likes

I would have returned back to demo long before 50 consecutive losses.

The question is based on profitable trading. Swing trading doesnât include trading at high volume. At least not for me. Swing trading involves a few trades, get stopped out, then catch a swing that lasts until your exit sign. In my case, D1, that could be weeks or months.

If you get stopped out three times, then catch the swing that lasts for six weeks, those three losses donât mean anything compared to the profits.

As a matter of fact in that case, the hit rate is only 25%. I would have taken three losing trades before catching the swing.

So, I actually would be willing to take a swing strategy with a 25% or even 20% hit rate.

Different strokes for different folks.

2 Likes

Understood, but this illustrates the problem with low win rate methods: you canât tell whether itâs still working, and you panic.

We all would.

But with that win rate, you will have that losing patch - itâs âwhen,â not âifâ.

4 Likes

If this is the case, I suggest returning to demo. If you havenât determined under what conditions your strategy works (swinging vs sideways), then you have more testing to do.

And there should be no panickingâonly faith in the strategy.

But then again, Iâm not a consistently profitable trader, so what do I know?

1 Like

Thatâs one way of looking at it. Another would be to say that you have more understanding of statistics to do.

Honestly, itâs close to unimaginable that an retail trader could profit long term from a system based on 5R. Some would just use the word âimpossibleâ. The important and helpful thing is to learn why, not to test more.

1 Like

Youâre right. Itâs impossible.

Personally, I choose the best win rate every time. If the win rate for the system Iâm using is 40%, then really, once I get on a losing streak, I would not have any confidence that any of my next five trades would be winners or that it will all balance out over time.

4 Likes

funny you!

1 Like

Assuming fix money risk

A.
win rate 90%
Risk to reward ratio 1:0.3
Even win rate = 10/13
profitability, [win rate] / [even win rate] - 1; 9/10 / (10/13) - 1 = 117/100 -1 = 17/100 = 0.17, or 17%
B.
30%
Risk to reward ratio 1:5
Even win rate = 1/6
profitability; 3/10 / (1/6) - 1 = 18/10 - 1 = 8/10 = 0.8, or 80%
C.
40%
Risk to reward ratio 1:1.5
Even win rate = 2/5
profitability; 4/10 / (2/5) - 1 = 20/20 - 1 = 0 = 0, or 0%
D.
win rate 70%
Risk to reward ratio 1:0.4
Even win rate = 5/7
profitability; 7/10 / (5/7) - 1 = 49/50 - 1 = -1/50 = -0.02, or -2%

Profitability ratio here is :
(( [gross profit] - [gross loss] ) / [total trade] ) / ( [gross loss] / [loss trade] )

in words, average net profit per trade for every average loss per trade
Profitability 50% means on average every trade you do is equal to making about 50% of your average stop loss

So if your average stop loss per trade is usd 10, than with that profitability, as long as you trade like youâve been doing, itâs as if you make usd 5 for every trade executed

Now you know that you should pick a method with highest profitability