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? Youâre surely not asking us to imagine that they all have the same number of entry opportunities?
Yeah, lets say that you get 1 trade per hour on each of them and every single one is the same
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 isnât really what these situations are about, at all, is it? So ⌠letâs 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 isnât just consecutive losers that are the problem, naturally.
Itâs 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 donât know where you are, and you donât 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 youâll 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 âexpectationâ is 4 times as high.
Which do you choose, yourself, @krecon ?
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 doesnât matter that B has four times the expectation, because it isnât 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.
Next case, please. 
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. Thatâs 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.
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.
Hi Krecon, and welcome to Babypips. My intuitive answer was B, but I am glad I read Pipsteroidâs answer before I wrote this. His rigorous analysis supports my âgut 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 âprofitâ. 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 âcrypto 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. 
Sounds like a swing strategy. Iâd 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.
âIf only.â
Thatâs how a 30% win rate âsounds as if it ought to work.â
It doesnât, though.
What actually happens with a 30% win rate is that you have times when youâre 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. 
I would have returned back to demo long before 50 consecutive losses.
The question is based on profitable trading. Swing trading doesnât 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 donât 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.
Understood, but this illustrates the problem with low win rate methods: you canât tell whether itâs still working, and you panic.
We all would.
But with that win rate, you will have that losing patch - itâs âwhen,â not âifâ.
If this is the case, I suggest returning to demo. If you havenât determined under what conditions your strategy works (swinging vs sideways), then you have more testing to do.
And there should be no panickingâonly faith in the strategy.
But then again, Iâm not a consistently profitable trader, so what do I know?
Thatâs one way of looking at it. Another would be to say that you have more understanding of statistics to do.
Honestly, itâs close to unimaginable that an retail trader could profit long term from a system based on 5R. Some would just use the word âimpossibleâ. The important and helpful thing is to learn why, not to test more.
Youâre right. Itâs impossible.
Personally, I choose the best win rate every time. If the win rate for the system Iâm 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.
funny you!
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 youâve been doing, itâs as if you make usd 5 for every trade executed
Now you know that you should pick a method with highest profitability
If you had actually read the thread and thought about it, before copying in again all those figures which were already listed above, you might have realised what shockingly bad advice that is.
The methods with the âhighest profitabilityâ are usually the most dangerous ones. For all the reasons explained above, and more.
And the profitability is in any case determined partly by the position-sizing (again, as discussed above and ignored by you), so it isnât even possible to tell from your âcalculationsâ which is the most profitable, anyway.