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  • #9,801
  • Dec 30, 2010 3:57pm Dec 30, 2010 3:57pm
Quoting Custos
Okay, let's start a new discussion.

What do you guys think is more important for compounding purposes.

High (e.g. 70%) Win-rate with negative R:R or high R:R with very low win-rate (e.g. 30%)?
Since I believe there is always a trade-off between win-rate and R:R, it is a valid discussion point.

As some of you know, I have been backtesting profit taking with high R:R for quite a bit. It still looks like the best way for me of compounding, but shiko's experiment made me think about win-rates.

Now, I was also thinking if we decrease the R:R to 1:1...
I will continue trading this demo for experimental purposes by trading only James 16 set ups on 4H and daily.
I think that high hit rate with higher stop compared to take profit can work, but only if stop is not moved like it happened few times in my case. It completely ruins results. Plus what take profit should be? smaller ok, but how smalller. For example if stop is 40 pips and take profit is 20-25 pips. It is ok, but if it is 10 pips take profit I do not know. Almost forgot, here is a nice article again from BRV/ Steve.

1. http://www.nobrainertrades.com/2008/11/stop-losses.html

2. http://www.nobrainertrades.com/2010/...placement.html
  • #9,802
  • Dec 30, 2010 4:08pm Dec 30, 2010 4:08pm
Quoting shiko
I think that high hit rate with higher stop compared to take profit can work, but only if stop is not moved like it happened few times in my case. It completely ruins results. Plus what take profit should be? smaller ok, but how smalller. For example if stop is 40 pips and take profit is 20-25 pips. It is ok, but if it is 10 pips take profit I do not know.
Thanks for the articles, I know them.

I think you missed my point. I wanted to discuss what is better for compounding. We take a system that has positive expectancy: When you increase R:R, the win loss drops. When you decrease R:R, the win loss increases.
So which is better? Both scenarios will end up profitable, but which one is better in terms of compounding profits?

With which will you end up with more profits in the end?
  • #9,803
  • Dec 30, 2010 4:22pm Dec 30, 2010 4:22pm
Quoting Custos
Thanks for the articles, I know them.

I think you missed my point. I wanted to discuss what is better for compounding. We take a system that has positive expectancy: When you increase R:R, the win loss drops. When you decrease R:R, the win loss increases.
So which is better? Both scenarios will end up profitable, but which one is better in terms of compounding profits?

With which will you end up with more profits in the end?

I got it. What you mean, what is better to bag the bunny, smoke it and deposit for more smoked bunnies Or let that bunny run and get fatter on spring grasses and only than after some longer period still bag it
I think it must be determined individually. How often are you going to compound? after every successful trade? day, week, month?
  • #9,804
  • Dec 30, 2010 4:31pm Dec 30, 2010 4:31pm
Quoting shiko
I got it. What you mean, what is better to bag the bunny, smoke it and deposit for more smoked bunnies Or let that bunny run and get fatter on spring grasses and only than after some longer period still bag it
I think it must be determined individually. How often are you going to compound? after every successful trade? day, week, month?
in general I would after each trade. Anyways, in a few days I will have the answer from my backtests.
  • #9,805
  • Dec 30, 2010 4:50pm Dec 30, 2010 4:50pm
Quoting Custos
in general I would after each trade. Anyways, in a few days I will have the answer from my backtests.
It would be interesting to know results. Letting trade run vs. taking profits and using them for further compounding. Einstein stated that compounding is the strongest force in the universe.
  • #9,806
  • Dec 30, 2010 5:03pm Dec 30, 2010 5:03pm
Quoting shiko
It would be interesting to know results. Letting trade run vs. taking profits and using them for further compounding. Einstein stated that compounding is the strongest force in the universe.
well, I think you still don't understand what I wanna do. I already know that compounding is a good force. And already tested letting profits run vs. taking profits and reusing them.

Right now I am just looking if a high win-loss and low R:R is better than a low win-loss and high R:R or the other way around.

Example: 70% win-loss and Risk:Reward 1:1 versus 30% win-loss and Risk:Reward 10:1

Where is the compounding effect stronger? Can't explain it any better. Sorry, english is not my first language, thus I seem to have difficulty in explaining the concept I am trying to backtest.
  • #9,807
  • Dec 30, 2010 5:30pm Dec 30, 2010 5:30pm
Quoting Custos
well, I think you still don't understand what I wanna do. I already know that compounding is a good force. And already tested letting profits run vs. taking profits and reusing them.

Right now I am just looking if a high win-loss and low R:R is better than a low win-loss and high R:R or the other way around.

Example: 70% win-loss and Risk:Reward 1:1 versus 30% win-loss and Risk:Reward 10:1

Where is the compounding effect stronger? Can't explain it any better. Sorry, english is not my first language, thus I seem to have difficulty in explaining...
No, I understand you completely.
It is just too much data to consider. I got your point. 10:1 R:R sounds like a lot
I wonder what is win rate for 10:1 trades?
  • #9,808
  • Dec 30, 2010 5:31pm Dec 30, 2010 5:31pm
I guess it is what you are trying to backtest.
  • #9,809
  • Dec 30, 2010 5:37pm Dec 30, 2010 5:37pm
I would be very content to make around 6% monthly with compounding each and every month risking 1% per trade.
  • #9,810
  • Dec 30, 2010 11:07pm Dec 30, 2010 11:07pm
close

reenter 2011...........see you all then

Quoting Jungles
short with target yet to be determined, but ~200 pips
  • #9,811
  • Dec 30, 2010 11:56pm Dec 30, 2010 11:56pm
Quoting Custos
Thanks for the articles, I know them.

I think you missed my point. I wanted to discuss what is better for compounding. We take a system that has positive expectancy: When you increase R:R, the win loss drops. When you decrease R:R, the win loss increases.
So which is better? Both scenarios will end up profitable, but which one is better in terms of compounding profits?

With which will you end up with more profits in the end?

The answer is obviously the one with the positive win rate. Why? Simply this: If you are compounding--that means the next trade or set of trades will use larger allocation of capital.
That also means the potential loss will be greater since you are using an increase in capital.
That is the reason why you want better win loss ratio.
With compounding you are constantly increasing the size of your risk. This increases the size of your drawdowns.
  • #9,812
  • Dec 31, 2010 2:19am Dec 31, 2010 2:19am
Quoting dddd
The answer is obviously the one with the positive win rate. Why? Simply this: If you are compounding--that means the next trade or set of trades will use larger allocation of capital.
That also means the potential loss will be greater since you are using an increase in capital.
That is the reason why you want better win loss ratio.
With compounding you are constantly increasing the size of your risk. This increases the size of your drawdowns.

If your R:R is 1:1 and win/ loss 70% you are going to do great. The most important is not to risk too much per trade. Because those 30% losses may come in bundles. I would say 1% generally to 2% for more aggressive approach. I also think it depends on which time frame signal comes. on daily I guess sit is possible to risk 2% because there is no so many signals on daily but lower than daily it is 1% because there is a risk to take more trades and suffer bigger DD if you have a losing streak.
One more point. I read Smith from Numex ABC method and he also states that outside of conventional stops he uses time stops. If after entry price fails to make anything within certain amount of time he closes trade. Had I done so with my first short Eur/Jpy I would end with small winner and avoid a full loser. The second short was quick, few hours and target reached , the first last almost 2 days going nowhere.
I think Custos can use it in his back testing as well. Time stop.
  • #9,813
  • Dec 31, 2010 2:21am Dec 31, 2010 2:21am
Happy New Year all and see you next year!
  • #9,814
  • Dec 31, 2010 2:22am Dec 31, 2010 2:22am
Happy New Year all and see you next year!
  • #9,815
  • Dec 31, 2010 3:51am Dec 31, 2010 3:51am
Quoting dddd
The answer is obviously the one with the positive win rate. Why? Simply this: If you are compounding--that means the next trade or set of trades will use larger allocation of capital.
That also means the potential loss will be greater since you are using an increase in capital.
That is the reason why you want better win loss ratio.
With compounding you are constantly increasing the size of your risk. This increases the size of your drawdowns.
hm, I just tested this idea out on several pairs.
You are right that the compounding is better when trading with higher win-loss and lower R:R.
But we have a drawback, and that is an important one. We have to be much more accurate with entries and stops and without lots of slippage on most of our trades.
If you go for the higher R:R and lower win-loss, the slippage and accuracy of entries & stops doesn't matter a lot. Less accuracy just means slightly lower profitability.
Now, if the R:R gets low and the win-loss gets high, we have to be very very accurate with our entries and stops and require very low slippage in order to make this profitable. Any drop in accuracy will significantly drop the profitability.
So, also an important consideration. Maybe high R:R's with low win-loss are more robust overall.
  • #9,816
  • Dec 31, 2010 3:54am Dec 31, 2010 3:54am
Quoting shiko
If your R:R is 1:1 and win/ loss 70% you are going to do great. The most important is not to risk too much per trade. Because those 30% losses may come in bundles. I would say 1% generally to 2% for more aggressive approach. I also think it depends on which time frame signal comes. on daily I guess sit is possible to risk 2% because there is no so many signals on daily but lower than daily it is 1% because there is a risk to take more trades and suffer bigger DD if you have a losing streak.
One more point. I read Smith from Numex ABC method...
I actually already backtested one in my systems. When london closes, it automatically goes out of position. The theory behind that is, if london liquidity providers close their shops, the major move I was hoping for should already have happened and will very likely not happen in other sessions. And it is pretty robust for eur crosses
  • #9,817
  • Dec 31, 2010 3:56am Dec 31, 2010 3:56am
Quoting Custos
hm, I just tested this idea out on several pairs.
You are right that the compounding is better when trading with higher win-loss and lower R:R.
But we have a drawback, and that is an important one. We have to be much more accurate with entries and stops and without lots of slippage on most of our trades.
If you go for the higher R:R and lower win-loss, the slippage and accuracy of entries & stops doesn't matter a lot. Less accuracy just means slightly lower profitability.
Now, if the R:R gets low and the win-loss gets high, we have to be...
Or we should be more picky with trades and use limit/ stop orders to avoid slippage.
I have been trading only with limit / stop orders for sometime and I have no problem with slippage. Accuracy of entry is also on the chart. i was trading No Brainer method for more than a year, so, accuracy is not of a problem.
I also think that with this method we still can have slightly better R:R than 1:1. even 1.2:1 to 1.5:1 is pretty reasonable depending upon how many pips we risk, where is the price and where is daily ATR.
  • #9,818
  • Dec 31, 2010 3:57am Dec 31, 2010 3:57am
Quoting shiko
Happy New Year all and see you next year!
you too, a happy new year
  • #9,819
  • Dec 31, 2010 4:00am Dec 31, 2010 4:00am
Quoting Custos
I actually already backtested one in my systems. When london closes, it automatically goes out of position. The theory behind that is, if london liquidity providers close their shops, the major move I was hoping for should already have happened and will very likely not happen in other sessions. And it is pretty robust for eur crosses
yeah, until some major announcement it is game over for the day at 11:00 EST a.m. here. It is London close.
It is what I was doing, coming back home, and closing trades that were still running. also, my R:R was set higher around 2:1 and some of losers and smaller winners missed targets by 5-10 pips and then smaller winner than 1:1 or loser.
  • #9,820
  • Dec 31, 2010 4:02am Dec 31, 2010 4:02am
Quoting shiko
Or we should be more picky with trades and use limit/ stop orders to avoid slippage.
I have been trading only with limit / stop orders for sometime and I have no problem with slippage. Accuracy of entry is also on the chart. i was trading No Brainer method for more than a year, so, accuracy is not of a problem.
I also think that with this method we still can have slightly better R:R than 1:1. even 1.2:1 to 1.5:1 is pretty reasonable depending upon how many pips we risk, where is the price and where is daily ATR.
there is a difference in limit and stop orders.

With limit orders you generally get favorable prices, positive slippage. With stop orders you very often get unfavorable prices, negative slippage.

Well, just to give you an example. I tested out a strategy on eur/usd.
First with high win-loss and low R:R. Now I could increase the slippage per trade to max 3 pips before it went unprofitable. I know it is already pretty good, because 3 pips slippage on each trade shouldn't happen normally.

But with a low win-loss and high R:R I could increase the slippage per trade to around 15 pips before it went unprofitable. A very comfortable margin.
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