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High hit rate vs big R:R - Which one do you prefer and why?

  • #21
  • Oct 8, 2015 9:35am Oct 8, 2015 9:35am
Quoting PipMeUp
Big RR: Lower win rate means a more volatile equity curve with deep drawdowns. It is easier to find a working method: follow the trend. This is statistically sound. It's not sexy in a forum. Big win rate: Higher compounding power and smooth equity curve. High probability that the system is actually a complete fluke waiting for the kiss of death. I'm yet to see a high WR system that stood the test of time or is at least statistically sound. Anyways you don't decide the RR or the win rate of your system. These are just properties of it.
A reply with a good angle.

It is true that the term big win rate attracts more follower compared to big RR and yes it is not sexy in a forum

Probably the reason for that is big win rate promises a sense of certainty where as big RR is associated with wild equity swings.
Different/opposing ideas will make us learn and understand many things.
  • #22
  • Oct 8, 2015 9:54am Oct 8, 2015 9:54am
Quoting Agro
{quote} For me the opposite to this helped me find success. For years I tried to force different rule sets upon my trading because this is what is recommended over and over again. "Follow your rules, stick to the plan". I was convinced that I had to have a superior R:R ratio to make it in this game and tried to force the market into different "systems" that would achieve this goal. It wasn't until I did away with this mindset though that I began to get consistent success. So for me the answer is it doesn't matter. Some days the market presents extremely...
Your reply begs for another question related to this thread but I'm gonna hold that for another opportunity.

The notion that a trader need to be flexible like you said means the trader must already achieve a high level of skills and accumulated a wealth of trading experience because otherwise it would be difficult for him to maneuver around the tricky market transitions. Isn't it?




*We already have several people who have participated in the poll.

Thank you!

I hope more will do the same for the sake of those who might stumble upon this question later in their trading career.
Different/opposing ideas will make us learn and understand many things.
  • #23
  • Oct 8, 2015 9:56am Oct 8, 2015 9:56am
Systems with higher win-rates tend to have significantly smaller overall edges and profit factors than systems with lower win-rates, and there are reasons for that.

For beginning traders, of course, higher win-rate methods can still be very suitable, as those tend also to be the traders with least understanding of position-sizing and the ones most likely to benefit from a smoother equity-curve.

Either can be perfectly viable, at least in theory, but trading realities predicate that authors like Van K Tharp (Trade Your Way to Financial Freedom) and others take quite a bit of space in their books to explain why systems with win-rates around 35-45% tend, overall, to be a much better and more reliable resource than systems with win-rates around 55-65%. Some beginners find this "counter-intuitive" - that depends on their own backgrounds, assumptions and understanding of probabilistic concepts.

On the other hand, it should also be mentioned that trading systems with win-rates much below about 20%, very good edges though they can sometimes have, are really very difficult to trade successfully and probably "for statisticians only", given the length of the losing runs and losing patches one can routinely encounter with them, often believing oneself "just to have been unlucky".

Much depends on trading frequency, too, of course: a system that trades only four or five times a year isn't so much use to anyone, really?
  • #24
  • Oct 8, 2015 10:15am Oct 8, 2015 10:15am
Quoting Don_xyZ
{quote}The notion that a trader need to be flexible like you said means the trader must already achieve a high level of skills and accumulated a wealth of trading experience because otherwise it would be difficult for him to maneuver around the tricky market transitions. Isn't it?
Only the highly skilled and experienced traders survive the long term. It is one of, if not the most, competitive industries out there. I liken it to a professional golf player. Millions upon millions of people aspire but very few will succeed. Beginner traders will not make money and if they do it will be short lived and only put false beliefs in their minds. In my opinion there is no point skirting around the edges with 'systems' but better to jump in the deep end and learn the market.
  • #25
  • Oct 8, 2015 12:35pm Oct 8, 2015 12:35pm
Quoting Agro
Only the highly skilled and experienced traders survive the long term.

This.


Quoting Agro
I liken it to a professional golf player. Millions upon millions of people aspire but very few will succeed.

I seem to be noticing this analogy more often, recently. (I've even stolen and used it myself, once or twice, in this forum, I think.) The more I think about it, the better an analogy I think it is. The "economic reality comparisons" really are striking, and pretty accurate. It's a far better analogy than the more widely-offered "poker-player analogy", I think. Very good post, just above.
  • #26
  • Oct 8, 2015 1:14pm Oct 8, 2015 1:14pm
Quoting Agro
{quote}In my opinion there is no point skirting around the edges with 'systems' but better to jump in the deep end and learn the market.
Many people believe there must be some trick and I assume that is the reason behind that craziness for some easy to follow systems or little nuances of those. You'll find that (faulty) expectation in almost every field where a lot of people won't achieve their desired results, regardless of whether it be sports (golf, gym members ...) or anything else.
  • #27
  • Oct 8, 2015 2:04pm Oct 8, 2015 2:04pm
Quoting Don_xyZ
{quote} Your reply begs for another question related to this thread but I'm gonna hold that for another opportunity. The notion that a trader need to be flexible like you said means the trader must already achieve a high level of skills and accumulated a wealth of trading experience because otherwise it would be difficult for him to maneuver around the tricky market transitions. Isn't it? *We already have several people who have participated in the poll. Thank you! I hope more will do the same for the sake of those who might stumble upon this question...

I talk about this problem here http://www.forexfactory.com/showthread.php?t=558453
In general terms, strategy with higher win rate (over 55%) and stable RR over 1 is always superior to anything else.
For example, a relatively mediocre scalping strategy with WR60% and RR 1.2 : 1 is absolute money machine compared to the typical 30% vs 3:1 that you can expect from VERY good trend following strategy.
An excellent scalping strategy with WR 85% and RR 0.5 :1 makes money faster than the FED printing press!
  • #28
  • Oct 8, 2015 3:04pm Oct 8, 2015 3:04pm
High win rate with AT LEAST a 1:1 R:R mainly because these strategies for me at least tend to be viable in markets even when ranging.. High R:R for me always required a lot of planning and monitoring which psychologically never worked for me. What makes absolute no sense however is people who use high hit rates without any MM what so ever, like those "10 pips a day" systems. All have a high win rate but 1/10 bad trades could just wipe profits.
  • #29
  • Oct 8, 2015 6:07pm Oct 8, 2015 6:07pm
@Xela, Agro and JensG
All of you mentioned some valid points and analogy and I like them.
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@alphaomega
That's (your thread) a good take on the issue of MM and RR but not what I had in mind. I'm gonna try to find it in the forum first and if I can't find it then I'll open a new thread.
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Back to your reply...
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So by 0.5:1 you mean something like 10 pips SL and 5 pips TP or is it 5 pips SL and 10 pips TP? I assume it's the first one but unless you mention it yourself people might get confused.
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@msfrd
interesting reply there. Questions for you:
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1. So you mean a system with high RR will work better on ranging market but at the same time it can also be used on a trending market?
2. In your opinion how should a trader with "10 pips a day" do their trading and what kind of MM is good for them?
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*Now the discussion become more interesting with more and more big RR suppoter stepping in
Just a reminder, don't forget the poll on the 1st page. Your opinion is what fuels the discussion.
Strange, I'm replying from my tab S and I can't seem to remove those A symbols from the finished post...
Different/opposing ideas will make us learn and understand many things.
  • #30
  • Oct 8, 2015 6:51pm Oct 8, 2015 6:51pm
Quoting Don_xyZ
So by 0.5:1 you mean something like 10 pips SL and 5 pips TP or is it 5 pips SL and 10 pips TP? I assume it's the first one but unless you mention it yourself people might get confused.
Yes, and NO! 0.5 :1 means the average loss is 2 times bigger than the average profit.
Note that I'm talking about AVERAGES here. It doesn't mean to use fixed SL and TP. Rigidity is bad thing. You need flexibility and dynamic positions management.
The exit of the trades is determined mostly by the market. Only the initial maximum SL is fixed, to serve as safety net. The upside is kept open(no fixed TP) to take advantage of persistent momentum anomalies ( fat tails). So naturally most of the profits will be close to 0.5:1 RR but in some cases can go over 20 :1 RR . But on the other side the maximum loss will never exceed 1 (the max SL).
  • #31
  • Edited 7:24pm Oct 8, 2015 6:55pm | Edited 7:24pm
Big and understated part of this is that some markets tend to revert to mean more frequently (perhaps could be explained better somehow), then in other end of spectrum eg. news of limited physical supply in some commodity is a bit more likely to cause one-way trends that last for a while and may not revert due to inflation.

Now people here also claim "small spreads are great" but as I explained earlier, large spreads can indicate that those offering the bid/ask are taking bigger risk, and that is possible indication of likelyhood of trending. The tighter the spread, the less likely trend is to persist or perhaps higher probability that the "tight price" hides risk that once enough fools are on the "right side" it will drop like a rock.

About high win rate .. well I haven't done testing to see if the spread says something about how practical high win rate stuff is. I've so far mostly focused on swing trades as I haven't figured out how you can scalp with high leverage without exposure to black swan flash crash where mm's stop quoting and there's some news that gets you trampled if you try to quote to avoid margin call. Yeah you could try to use some retail broker that doesn't chase you for money when account goes negative but ummm seems a bit fishy tactic. (yeah next you say.. well "hedge at other account".. what if the HFT already picked up all the liquidity going that way? - you pretty much need some co-lo algos or option protection etc to play this scalp game .. ok then "scalp with no/low leverage" .. I'm kinda working on something like that so will see how that goes - couple trades a week kinda thing - bit different from those few minute to hour scalps I tried )
  • #32
  • Oct 8, 2015 7:29pm Oct 8, 2015 7:29pm
Quoting fxjesus
Big and understated part of this is that some markets tend to revert to mean more frequently (perhaps could be explained better somehow), then in other end of spectrum eg. news of limited physical supply in some commodity is a bit more likely to cause one-way trends that last for a while and may not revert due to inflation. Now people here also claim "small spreads are great" but as I explained earlier, large spreads can indicate that those offering the bid/ask are taking bigger risk, and that is possible indication of likelyhood...
That's very good observation!
The most traded markets have the tightest spreads because there is a lot of competition, and all market makers want piece of the pie. On the other side, the large participation rate creates a lot of noise witch leads to stronger mean reversion tendency and creates a lot of inefficiency on the micro time frames. ( this is great opportunity for scalpers).
For example the major pairs 10 years ago use to be a little bit more quiet with more stable trends. Now the days are crazy with all that algo trading and HFT going on. Even during "quiet" times prices are changing 20-30 times per sec. on most ECNs.
And the futures markets are insane these days - (thousands, sometimes even millions of orders per sec.) So in today's markets mean reversion strategies tend work better 90% of the time, especially in FX. And from time to time we have flash crashes .......
  • #33
  • Oct 8, 2015 10:43pm Oct 8, 2015 10:43pm
Quoting JensG
{quote} Many people believe there must be some trick and I assume that is the reason behind that craziness for some easy to follow systems or little nuances of those. You'll find that (faulty) expectation in almost every field where a lot of people won't achieve their desired results, regardless of whether it be sports (golf, gym members ...) or anything else.
Exactly. It is the way things are marketed these days. Much of modern marketing targets the lazy (or perhaps just time constrained) and instant gratification seeking behaviour that is prevalent in our societies. Golf marketing is full of it - just buy these clubs, this ball, this program that will show you the 'secret' of the pros. Gym goers are presented with the same - this supplement, that supplement, HIIT, progressive overload. The one easy fix that is the answer to all your dreams.

I think the marketing around the trading industry is more amplified in this aspect than most other industries. Brokers and perhaps even professional traders and institutions needing dumb liquidity have much to gain by sending everyone on that endless search to find that secret that will make you a millionaire in months. People selling courses need you to believe that they have that secret. Even many people just running about on forums like this want you to believe it either for eventually selling it or just as an ego boost.
  • #34
  • Oct 9, 2015 12:25am Oct 9, 2015 12:25am
Quoting Agro
{quote} Exactly. It is the way things are marketed these days. Much of modern marketing targets the lazy (or perhaps just time constrained) and instant gratification seeking behaviour that is prevalent in our societies.

I think the marketing around the trading industry is more amplified in this aspect than most other industries. Brokers and perhaps even professional traders and institutions needing dumb liquidity have much to gain by sending everyone on that endless search to find that secret that will make you a millionaire in months. People...
Its the same today as it was a hundred years ago with bucket shops. Its not the fault of modern marketing or brokers. They are simply responding to a demand. People tend to have biases that lead to sabotage when confronted with the nature of markets. The game of speculation is as old as the hills and so is human nature.
  • #35
  • Oct 9, 2015 12:46am Oct 9, 2015 12:46am
Painstakingly calculating your RR when it is positive gives you that warm and fuzzy feeling that may be you are onto something... only to be proven very wrong after the next trade or two.
RR was created by Mr. Tharp so that he could sell books and speaking engagements...
How can you be certain or your risk-reward ratio when the outcome (reward) is a random event?. The risk can be known but never the reward. Therefore you can never rely on the current expectancy for the future. Mr. Tharp's work has the appearance of solid math and logic but is totally useless in actual practice.
  • #36
  • Oct 9, 2015 1:07am Oct 9, 2015 1:07am
Quoting Mingary
Painstakingly calculating your RR when it is positive gives you that warm and fuzzy feeling that may be you are onto something... only to be proven very wrong after the next trade or two. RR was created by Mr. Tharp so that he could sell books and speaking engagements... How can you be certain or your risk-reward ratio when the outcome (reward) is a random event?. The risk can be known but never the reward. Therefore you can never rely on the current expectancy for the future. Mr. Tharp's work has the appearance of solid math and logic but is totally...
what Mingary said is very right. the reward you can never know, you only get what market will give you.
the market is always in a move, it is dynamic, so your exit should be.
what is the point of putting a statical reward there you may never reach ?
patience is a virtue
  • #37
  • Oct 9, 2015 2:19am Oct 9, 2015 2:19am
Quoting Atokys
{quote} Its the same today as it was a hundred years ago with bucket shops. Its not the fault of modern marketing or brokers. They are simply responding to a demand.
Responding to demand and creating demand for useless or unattainable things are two completely different things. The bullshit that is peddled in this industry is much like the bullshit peddled in the fashion industry who take the most beautiful women in the world and then airbrush their photos. What they are creating demand for is unattainable - it doesn't exist.

I don't believe it has always been this way. For one, they didn't have the avenues such as TV and the internet to constantly bombard the public. But if that is all it was, bombardment, then that would be fine. But the study of phsychology has come a long way and marketing leans heavily on this. The colours, sounds, playing on peoples fear, greed, need to fit in etc. Hugely profitable companies spending huge portions of their revenue to create demand for useless crap and quests that can never be satisfied, at least not by the solutions they offer. Obviously this is not true for all marketing.
  • #38
  • Oct 9, 2015 2:24am Oct 9, 2015 2:24am
very interesting topic. IMHO there is no perferct answer. It is needed to find balance between RR and hit rate. Extremes do not make sense.

I personally prefer to make analysis of my trades at the end of every moth. The part of analysis is also to simulate what would be the result if my TP would be R3 instead of R2 (for example)... The output of this analysis is list of items what should be done better in next trades.
  • #39
  • Oct 9, 2015 2:27am Oct 9, 2015 2:27am
Quoting Mingary
How can you be certain or your risk-reward ratio when the outcome (reward) is a random event?. The risk can be known but never the reward. Therefore you can never rely on the current expectancy for the future. Mr. Tharp's work has the appearance of solid math and logic but is totally useless in actual practice.
Very well said. The problem is that people tend to calculate their risk and then put a requirement on the market in the belief that they need to achieve some R:R. This then removes their ability to react when the market is clearly saying "stuff you and your target buddy".
  • #40
  • Oct 9, 2015 2:41am Oct 9, 2015 2:41am
Quoting Agro
{quote} Very well said. The problem is that people tend to calculate their risk and then put a requirement on the market in the belief that they need to achieve some R:R. This then removes their ability to react when the market is clearly saying "stuff you and your target buddy".
Indeed.
I seem to have more luck when my trading is "account based" rather than "market based"
.
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