Losing is fate if Winning ratio is 50%?

Discussions about Money Management and Risk Control.
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oem7110
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Losing is fate if Winning ratio is 50%?

Post by oem7110 » Tue Mar 16, 2010 12:06 pm

Does anyone know that any money management approach can still make profit for a long period of time with 50% winning ratio?
I have tested with general money management approach for 2000 trades, if the winning ratio is 50%, my initial equity is 10000, the final equity is always less than the original amount, but if the winning ratio is above 53%, my initial equity is 10000, the final equity is always more than the original amount. Is it a fate to lose with 50% winning ratio? no matter what kind of money management strategy you can apply. Therefore, Casio is always the winners and it is his fate.
Does anyone have any suggestions?
Thanks in advance for any suggestions
Eric

sluggo
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Post by sluggo » Tue Mar 16, 2010 1:24 pm

Mechanical trading systems for futures contracts, typically have winning rates around 30% or 40%, and yet are profitable. A fairly typical example is shown below; it's a 20-year simulation of a futures trading system whose winning rate is 37.1%. However, as the table shows, winning trades are 4X bigger than losing trades (+3.35% vs. -0.83%). Losers are cut short, while winners are allowed to run.

Typical mechanical trading systems for futures, use "fixed fractional" position sizing / risk management. The typical system pictured here, uses it too.
Attachments
fairly_typical.png
Trading Blox simulation of a typical futures trading system
fairly_typical.png (29.13 KiB) Viewed 3889 times

oem7110
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Post by oem7110 » Tue Mar 16, 2010 5:03 pm

sluggo wrote: Losers are cut short, while winners are allowed to run.

Typical mechanical trading systems for futures, use "fixed fractional" position sizing / risk management. The typical system pictured here, uses it too.
When you refer to "Fixed fractional", do you mean using fixed% of equity for each trade.
For example, 5%,
when this trade is winning, then next trade will keep using 5% of current equity (more money).
when this trade is losing, then next trade will keep using 5% of current equity (less money).

I tried "fixed fractional" approach with 50% winning ratio, which does not work, could you please tell me why your shown example is having profit?

For example, I have tried using fixed fractional from 1% to 10% with 40% winning probability, win/lose ratio is 1/1, which mean that you are either win 10% of equity or lose 10% of equity for each trade, after 2000 trades, the total equity is always less than the original one.
However, when I change the win/lose ratio is 2/1, for using 10% of equity, you are either win 20% of equity or lose 10% of equity for each trade, with winning probability is below 33%, the total equity is always less than the original one.

Is there any formula to determine whether the system is profitable or not based on win/lose ratio and winning probability?

Do you have any suggestions?
Thank you very much for any suggestions
Eric

AFJ Garner
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Post by AFJ Garner » Tue Mar 16, 2010 6:18 pm

I have just looked through the sections in which you have made your 133 posts and it sees to me that you are not a Trading Blox user. Pity - that would have made it all rather simple, especially since myself and others have posted actual systems and system parameters which come up with very satisfying back tested results.

I am not sure what back testing platform you are using and have not looked in detail at your posts to see whether you are testing stocks or futures.

But look at it this way. In Trading Blox there is a built in "fixed fractional " money manager which does indeed work the way you describe. In Trading Blox there are a number of highly useful and complete trend following starter systems all of which can be made to produce handsome profits with 40% winning trades or even 15% winning trades. The possible permutations are endless. Whether you use the Bollinger Band Breakout, the double or triple moving average systems, the Donchian system or any of the other built in trend following systems you can twiddle the dials and come up with very satisfying back testing profits using parameter optimisation rather than curve fitting.

So, the easy way is to buy TB and start twiddling the dials on these built in systems.

If you already own some other comparable back testing engine capable of testing portfolios, then plug in (by way of example) a triple moving average system and, using a decent sized portfolio of diversified futures, add a fixed fractional bet sizing strategy and then experiment with different parameters for each of the short, medium and long term moving average.

I defy you not to come up with something looking at least somewhat like Sluggo's test above.

babelproofreader
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Post by babelproofreader » Tue Mar 16, 2010 6:40 pm

You appear to be confused by the mathematics: if your wins and losses are equal then a 50% winning probability is break even, anything less than a 50% winning probability will obviously be a net losing situation. Similarly, if your wins are twice the size of losses a 33% winning probability is break even, anything less than a 33% winning probability will also obviously be a net losing situation.

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Post by Miles » Wed Mar 17, 2010 4:09 am

Is there any formula to determine whether the system is profitable or not based on win/lose ratio and winning probability?
If your wins and your losses are a fixed %-age of current equity, you can use this formula to determine the winning ratio (% of winners) required to be break-even:

x = winning probability (from 0 to 1) for break-even
a = % won on winning trades, example 0.1 for 10%
b = % lost on losing trades, example 0.05 for 5%

x = (ln(1) - ln(1-b)) / (ln(1+a) - ln(1-b))

Applied to your example
you either win 10% of equity or lose 10% of equity for each trade
that gives x = (ln(1) - ln(0.9)) / (ln(1.1)-ln(0.9)) = 0.525, so you need 52.5% of winning trades to be break-even.

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