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Systems in theory

  • #1
  • First Post: Jul 25, 2006 9:38am Jul 25, 2006 9:38am
In theory, each and every single trading system is atleast right 50% of the time. So in theory, you should never loose money. How many of you got what I meant?
  • #2
  • Jul 25, 2006 9:42am Jul 25, 2006 9:42am
Quoting blueshift
In theory, each and every single trading system is atleast right 50% of the time. So in theory, you should never loose money. How many of you got what I meant?
Duh.... What if the losses are massive and the wins are tiny? Where is this post meant to lead? Am I missing something here?
The framework is there; we just have to work on our frame of mind.
  • #3
  • Jul 25, 2006 9:43am Jul 25, 2006 9:43am
Quoting niceguy777
Duh.... What if the losses are massive and the wins are tiny? Where is this post meant to lead? Am I missing something here?
that is why I said...only in theory. It was just an observation, and was wondering if someone else noticed the same thing.
  • #4
  • Jul 25, 2006 9:50am Jul 25, 2006 9:50am
Quoting blueshift
that is why I said...only in theory. It was just an observation, and was wondering if someone else noticed the same thing.
OK. Thanks. Frankly, I only concentrate on working one system. I think if I tried loads of them that are out there, I'd never trade. And I don't know if it's a worthwhile pursuit getting that confused! I guess it also depends on what you mean by a 'system'. I've seen some wacko ones along the way, and people who are new to trading have little to go by to discern which is which. Did you find that?
The framework is there; we just have to work on our frame of mind.
  • #5
  • Jul 25, 2006 9:55am Jul 25, 2006 9:55am
Quoting niceguy777
OK. Thanks. Frankly, I only concentrate on working one system. I think if I tried loads of them that are out there, I'd never trade. And I don't know if it's a worthwhile pursuit getting that confused! I guess it also depends on what you mean by a 'system'. I've seen some wacko ones along the way, and people who are new to trading have little to go by to discern which is which. Did you find that?
I never meant to confuse anyone. I apologize for that.
All I was trying to say is that theoretically speaking, a system can never have a success rate of less than 50%.

for example: A system that gives +ve pips 3 out of 4 times. Its success rate is 75%.

A system that gives +ve pips 1 out of 4 times. Then you can just do the exact opposite of what your system tells you to do. That way, its success rate would be 75% too.

Of course I realize that this wouldn't work in the real market, but I just wanted to share this thought with everyone.
  • #6
  • Jul 25, 2006 10:55am Jul 25, 2006 10:55am
On what facts have you based this assumption (That any system can't have a success rate less than 50%)...Most trend following systems usually have a success rate of less than 50%, theoritically speaking, trend following systems have a success rate of 35% or less....

An example for that is a simple moving average cross over system...Such a system would produce a success rate of less than 50% for sure...


Thanks,

Nader
  • #7
  • Jul 25, 2006 11:00am Jul 25, 2006 11:00am
Here is a system with a zero % success rate...

It is not complicated... Place a trade, either buy or sell at the market in the highest pip spread possible. Immediately close the trade and take the loss on the spread... Repeat as often as the account will allow.

Scott


Quoting blueshift
I never meant to confuse anyone. I apologize for that.
All I was trying to say is that theoretically speaking, a system can never have a success rate of less than 50%.

for example: A system that gives +ve pips 3 out of 4 times. Its success rate is 75%.

A system that gives +ve pips 1 out of 4 times. Then you can just do the exact opposite of what your system tells you to do. That way, its success rate would be 75% too.

Of course I realize that this wouldn't work in the real market, but I just wanted to share this thought with everyone.
  • #8
  • Jul 25, 2006 11:20am Jul 25, 2006 11:20am
Quoting smjones
Here is a system with a zero % success rate...

It is not complicated... Place a trade, either buy or sell at the market in the highest pip spread possible. Immediately close the trade and take the loss on the spread... Repeat as often as the account will allow.

Scott
now this would be indeed a very profitable system... for the broker
I'm not insane; my mother had me tested.
  • #9
  • Jul 25, 2006 12:15pm Jul 25, 2006 12:15pm
lol Scott. It was just an idea. But speaking purely in theory, I'm convinced I'm right. But its never gonna work in practice.

Nader: what about if you reversal your signals. Buy during sell signals and vice versa? That in theory would be a 65% success rate, but wouldn't actually work in the actual market.
  • #10
  • Jul 25, 2006 3:15pm Jul 25, 2006 3:15pm
Quoting blueshift
In theory, each and every single trading system is atleast right 50% of the time. So in theory, you should never loose money. How many of you got what I meant?
First, you will lose the spreads. But assuming that some systems could work, that also means that systems could lose consistent. Just by doing the opposite of a profitable system.
  • #11
  • Edited 7:23pm Jul 25, 2006 4:09pm | Edited 7:23pm
Use this spreadsheet to determine performance of trading strategy over 1 year (250 trading days) with:

1.) Starting account value
2.) Account Risk
3.) Winning probability
4.) Risk/reward ratio

I find a strategy with a minimum of 40% winning probility and a RR ratio of somewhere between 2.0 to 2.5 is good with a risk of 3%.

The spreadsheet neglects the spread/commission but you will see that the number of winning trades is only half the question.
Attached File(s)
File Type: zip MC.zip   29 KB | 488 downloads
  • #12
  • Jul 26, 2006 4:15am Jul 26, 2006 4:15am
It is a system, like a system used in casino's. Put a dollar on red. When you win, collect your money, when you lose double your bet. If you do that for a short time, you will always win. However waiting long enough means that one day you will lose a huge amount of money, more then the gains you had until that moment.


In fact you create a system with a very big chance on winning a small amount and a very small chance of losing a huge amount.
  • #13
  • Jul 26, 2006 4:47am Jul 26, 2006 4:47am
Quoting blueshift
In theory, each and every single trading system is atleast right 50% of the time. So in theory, you should never loose money. How many of you got what I meant?
Your theory is flawed. You are only taking into account one of the several mathematical factors of profitability.

The first, as you identified, is win rate. You might be interested to know that I have seen profitable trading systems that had a win rate around 30%. How does this occur?

The second most important dimension of profitibility is win/loss size. In your first theory, you are implicitly assuming that the risk and gain for every trade is identical. This is rarely true in practice. This can be measured by having a stop loss different from your T/P. Having a smaller stop and a larger T/P will skew profitability upwards (*all else being equal*). Of course most win rates would go down when the stop gets smaller, so that would ultimately affect profitability.

The third most important thing you forget is costs. Every trade has a cost. The most obvious is spreads. In theory, if every market participant won exactly 50% of their trades, and risk/reward were the same, then everyone would slowly lose money due to transaction costs. In a no-cost system, everyone would have the same amount of money over a long timeframe.

One of the most important measures of any trading system is called the sharpe ratio. This is the first thing I look at (or calculate) when I look at a new trading system. I don't remember the forumula, you can Google it if you want more info on it. It reflects both the win rate and the win/loss ratio. Sharpe numbers higher than 0 are profitable, and higher than 1 are good systems. Anything higher than 2 is great. It is interesting to note that most hedge funds have ratios around 0.3-0.5. I know of several traders whose sharpe ratios are above 1 consistently, including myself 8).
  • #14
  • Last Post: Jul 26, 2006 8:14am Jul 26, 2006 8:14am
Quoting silverpike
Your theory is flawed. You are only taking into account one of the several mathematical factors of profitability.

The first, as you identified, is win rate. You might be interested to know that I have seen profitable trading systems that had a win rate around 30%. How does this occur?

The second most important dimension of profitibility is win/loss size. In your first theory, you are implicitly assuming that the risk and gain for every trade is identical. This is rarely true in practice. This can be measured by having a stop loss different from your T/P. Having a smaller stop and a larger T/P will skew profitability upwards (*all else being equal*). Of course most win rates would go down when the stop gets smaller, so that would ultimately affect profitability.

The third most important thing you forget is costs. Every trade has a cost. The most obvious is spreads. In theory, if every market participant won exactly 50% of their trades, and risk/reward were the same, then everyone would slowly lose money due to transaction costs. In a no-cost system, everyone would have the same amount of money over a long timeframe.

One of the most important measures of any trading system is called the sharpe ratio. This is the first thing I look at (or calculate) when I look at a new trading system. I don't remember the forumula, you can Google it if you want more info on it. It reflects both the win rate and the win/loss ratio. Sharpe numbers higher than 0 are profitable, and higher than 1 are good systems. Anything higher than 2 is great. It is interesting to note that most hedge funds have ratios around 0.3-0.5. I know of several traders whose sharpe ratios are above 1 consistently, including myself 8).
How about swapping buy and sell signals for that system? That would make the system 70% profitable (In theory with many assumptions). And of course, this isn't gonna work in practice, due to several factors mentioned by you and everyone else. I realized that even before starting this thread.
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