Hi, I thought this will be a pretty interesting discussion.
For the last few months I asked myself, if it is desirable to have a system with a high win/loss ratio or to have a system with a high R:R. As far as my understanding goes, those two paramater are mutually exclusive, meaning you can either have a high win/loss or a high R:R, not both.
I was playing around with some "positive-expectancy" systems and started optimizing values to the point of overoptimization. That happened with recent half a year of data.
Now these optimized values were then applied to 10 years of data to be able to see the robustness of the system.
In short, the results were the following: If the optimized values favored a high win/loss ratio on half a year data, this high win/loss got completely eradicated when applied to 10 years of data, but still stayed positive in terms of net pips accumulated.
However, when the optimized values favored a high R:R on half a year data, the R:R only slightly changed, when applied to 10 years of data. Obviously, I was always much more positive in terms of pips, than with the high win/loss values.
What does all this mean? I can't talk for all systems out there, but I think most probabilities change over time. Take anything from PA & S/R to indicators, and that is also the reason why over the long-term most systems fail, cause of changing probabilities in the market.
However, if you were always trying to achieve high R:R with low win-loss, the performance of your account won't be dramatically altered, when the probability of a pattern changes.
That is why I came to the conclusion that it is not very desirable to search for high-probability, but rather for high R:R in trading systems. Of course, here we only talk about positive expectancy systems - systems with a statistical edge.
Any comments are welcomed!
For the last few months I asked myself, if it is desirable to have a system with a high win/loss ratio or to have a system with a high R:R. As far as my understanding goes, those two paramater are mutually exclusive, meaning you can either have a high win/loss or a high R:R, not both.
I was playing around with some "positive-expectancy" systems and started optimizing values to the point of overoptimization. That happened with recent half a year of data.
Now these optimized values were then applied to 10 years of data to be able to see the robustness of the system.
In short, the results were the following: If the optimized values favored a high win/loss ratio on half a year data, this high win/loss got completely eradicated when applied to 10 years of data, but still stayed positive in terms of net pips accumulated.
However, when the optimized values favored a high R:R on half a year data, the R:R only slightly changed, when applied to 10 years of data. Obviously, I was always much more positive in terms of pips, than with the high win/loss values.
What does all this mean? I can't talk for all systems out there, but I think most probabilities change over time. Take anything from PA & S/R to indicators, and that is also the reason why over the long-term most systems fail, cause of changing probabilities in the market.
However, if you were always trying to achieve high R:R with low win-loss, the performance of your account won't be dramatically altered, when the probability of a pattern changes.
That is why I came to the conclusion that it is not very desirable to search for high-probability, but rather for high R:R in trading systems. Of course, here we only talk about positive expectancy systems - systems with a statistical edge.
Any comments are welcomed!