Winning percentage vs Percent gained

I’ve been experimenting with many different trading methods, some that look for small gains and take a profit and some that look to catch long term trends.

My question is would you guys rather have a system with a bad win percentage but huge gain potential or a strong win percentage with small gains on single trades.

So would you rather take 10 trades with a 20% chance to win 10% and 80% chance to lose 2% or would you rather take 10 trades with an 60% chance to win 2% and a 40% chance to lose 2%. Both scenarios net at 4% but I would rather take the system with the higher win percentage and here is why.

Consecutive losses eat away at your percentage increase more than anything, we have all seen the chart in baby pips school of how your equity goes down with 8 consecutive loses at 2% risk. The difference between the two scenarios is the percent chance of consecutive losses, I feel like there is less risk for a big drawdown with a smaller losing percentage, therefore I can risk more of my account as my win percentage goes up but not if my percent gains increase.

Let me know what you guys think of this and feel free to post your percentage of winning trades vs total gain percentage if you have been trading a long time.

Winning percentage is almost totally meaningless in trading except for marketeers and psychological comfort. The only number you have to pay any attention to is the net profit. Keep it as simple as possible and ignore side issues like winning percent.

Your scenario offers two possibilities to obtain the same profit growth, so that is more complicated and I think the answer has more to do with the individual than any “correct” answer. I suppose that I prefer the small steady gains rather than the relatively greater swings of big gains and losses. But if someone else feels differently, then I can’t disagree. But anyone looking for a high winning percentage for the sake of bragging rights that goes with a high winning percentage is on the wrong track.

Sorry I guess I am not being clear.

Using the 8 losses in a row example, risking 2% will compound to about 15% over 8 periods of consecutive losses. If we are truly maintaining a 2% (or whatever %) risk, then the losses will begin to compound and eat away at our equity. A losing probability of .8 has a .167 chance of giving 8 losses in a row. A losing probability of .4 has a .00065 chance of giving 8 losses in a row. (0.8^8 and 0.4^4). I was wondering if other people agree that it becomes safer to risk a larger percent of my account when I have a higher winner percentage. I am curious to see what the correlation is between win percentage and total % gain. Obviously 80% to lose is an extreme example but even at 5 periods, you are 32 times more likely for 5 consecutive losses with a losing percentage of 80% vs 40%. I think that should have some weight on how much you can risk.

If two trading systems have equal expected return, as the ones you have outlined do, then the second level comparison (when speaking strictly in rational terms) is volatility. You go with the system with the lowest volatility or returns such that for each unit of risk you take you are earning more (think Sharpe ratio, or something like that). I haven’t run the math, but the second system looks to be the less volatile, so would be preferred.

My theory on money management system programming is as follows:

  1. Determine Winning Percentage Based on Historical Testing

  2. Use math to determine the what the largest losing streak you’re likely to see over X-number of trades that you expect to see in your lifetime. Let’s says it ends up being that over the course of 50,000 trades the math says the highest number of losses in a row you’re likely to see is 25.

  3. Use the highest amount of risk possible per trade with the provision that if you hit the identified number of losing trades in a row (25) it doesn’t reduce your account to zero. Most likely this is going to be quite a bit higher than 2% per trade. Probably closer to 5% max per trade…but probably not on every trade if you use stairstep money management in which case the risk per trade will naturally vary.

  4. As you build your account up at a much faster rate, remove large portion of the balance and place it in a lower risk environment. So lets say you take your $10,000 account and build it up to $100,000. As soon as you reach this level you’re going to start on the string of 25 losses in a row. You don’t know this, but it’s about to happen. Let’s say that this losing streak is going to reduce your balance by 75%. So by the time you see your next win, your $100,000 would be reduced to $25,000. Ideally, though, you would have as part of your money management plan periodic removal of funds to guard against this very thing. So your plan is to remove 50% of your account balance once you reach $100,000. So you follow your plan, take out $50,000 and put it in a mutual fund or something else with lower risk and then continue to trade with the $50,000 left over. You still hit a series of 25 losses in a row and your $50,000 is reduced by 75%…but that leaves you with $12,500 plus the $50,000 you put in the mutual fund. So you now have a total of $62,500 left over regardless of the fact that you just hit a period of time where you took a 75% drawdown in your trading.

Obviously, for this to work, you have to have a schedule of what the account balance levels need to be when you do the reduction and you need to not get too greedy and actually do the withdraw when you’re actually WINNING. This can be difficult to do as one might be thinking about how long it took to get to $100,000 and how fast it will be to get to $150,000 now. This is really just the same dilemma though as determining how long to let a winner run before you check out and take your profit. A lot of people get greedy and don’t have a point determined where they take the profit off the table, so their winning trades turn into loser because they think the win is going to keep going forever. If you have the discipline to pull the plug on a winning trade at a predetermined level, then you can have the discipline to withdraw funds from you account when on a winning streak as well. This allows one to run a profitable system it’s highest possible potential without worrying about the higher risk.