TRADE SYSTEMS AS SUCH
Last time I was talking about expectations and the use of stops. One of the things that interested me was the relation between a stop and other system parameters like amount of losses/winners and the average win/loss. I stated that for a given trade system a clear relation between these parameters doesn't exist.
But, as you may have noticed in earlier postings I wrote about the win ratio and it's relation to expectation. I described expectation in terms of win ratio (chance of a winner) and one of the things I found was a clear relation between the win ratio and the profit ratio (= average/average loss. From the figure given there some conclusions cold be drawn how big the profit ratio has to be with a given win ratio for the expectancy to be positive.
Now, you could ask, is this in contradiction with findings in my last post?. It is maybe a surprise but I think there isn't.
When I tried to describe a relation between expectancy and win ratio I was primarily interested to let you see the importance of a high win ratio, in contrary to some, or most, writers who stress the importance of an overall profit but ignore to tell you the serious problems you encounter when your trading systems comes up with only a few winners and a bunch of losers. They may be right but is it workable, see my last posting about expectancy and win ratio
So, in these postings I was comparingdifferent trade systems to each other. I then focussed one a particular system and its parameters. I have a strong conviction in the existence of trade systems as such, whose trade parameters are fixed. I think of trade systems as being some entity that produces so and so many trades a year, with a certain expectation per trade and profit factor. Seeing systems this way it is no longer a contradiction to say that parameters of a system in particular are dependant.
Now, the question is now as follows. When I or you try to trade this system, do we get the same results as theoretically would be possible? I already posted before about this (Luck and Randomness) and I suspected then some interesting aspects of trading on which I want to post in the future.
But, as you may have noticed in earlier postings I wrote about the win ratio and it's relation to expectation. I described expectation in terms of win ratio (chance of a winner) and one of the things I found was a clear relation between the win ratio and the profit ratio (= average/average loss. From the figure given there some conclusions cold be drawn how big the profit ratio has to be with a given win ratio for the expectancy to be positive.
Now, you could ask, is this in contradiction with findings in my last post?. It is maybe a surprise but I think there isn't.
When I tried to describe a relation between expectancy and win ratio I was primarily interested to let you see the importance of a high win ratio, in contrary to some, or most, writers who stress the importance of an overall profit but ignore to tell you the serious problems you encounter when your trading systems comes up with only a few winners and a bunch of losers. They may be right but is it workable, see my last posting about expectancy and win ratio
So, in these postings I was comparingdifferent trade systems to each other. I then focussed one a particular system and its parameters. I have a strong conviction in the existence of trade systems as such, whose trade parameters are fixed. I think of trade systems as being some entity that produces so and so many trades a year, with a certain expectation per trade and profit factor. Seeing systems this way it is no longer a contradiction to say that parameters of a system in particular are dependant.
Now, the question is now as follows. When I or you try to trade this system, do we get the same results as theoretically would be possible? I already posted before about this (Luck and Randomness) and I suspected then some interesting aspects of trading on which I want to post in the future.
posted by Carlo Giuntoni at 1:43 PM
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