60% mechanical system - good or bad?

[It's Snake Pliskin]

With respect to mechanical systems and their abilities to provide returns and drawdowns would a 60% win rate system be good or bad and for what reasons? I am interested in peoples' thoughts on drawdowns and returns.

Before the money management taglines are thrown save your fingers - I already know. Some real thinking out of the square is welcomed.

Post away threadsters!

 

[theasxgorilla]

60% winners, 40% losers. Good. I would think you can work that.

Can you elaborate any other stats from backtesting or actual trading of said system? Or is this a hypothetical?

 

[wayneL]

With respect to mechanical systems and their abilities to provide returns and drawdowns would a 60% win rate system be good or bad and for what reasons? I am interested in peoples' thoughts on drawdowns and returns.

Before the money management taglines are thrown save your fingers - I already know. Some real thinking out of the square is welcomed.

Post away threadsters!

Win rate by itself is irrelevant, the other part of the equation is risk verses reward. This will give you the expectancy of the system. Next, opportunity; how often does it trade?

 

[theasxgorilla]

Next, opportunity; how often does it trade?

Thats a big one. Do you take a trade once a year and over five years you won 3, lost 2?? : Or can you find a trade a week, with one really good trade every month??

 

[tech/a]

I'm with Wayne.

Win 6 X 10%
Lose 4 X 20%

Nett losing method.
These tools maybe handy Snake.

 

[nizar]

With respect to mechanical systems and their abilities to provide returns and drawdowns would a 60% win rate system be good or bad and for what reasons? I am interested in peoples' thoughts on drawdowns and returns.

Before the money management taglines are thrown save your fingers - I already know. Some real thinking out of the square is welcomed.

Post away threadsters!

Depends what (average win/average loss) or R/R, is.
Once you have both win rate and R/R, then you can calculate the mathematical expectancy of the system using:

Expectation = Pw*Aw - Pl*Al

Where Pw = probability of win (60%)
Pl = probability of loss (40%)
Aw = average win (x)
Al = average loss (y)

If this is positive then the system provides an edge or a positive expectation and is expected to be profitable over many trades, which is good

Also, trade frequency ie. opportunity, is important as Wayne has mentioned.

Nick has mentioned that some people who designed EOD systems can trade using hourly charts to increase trade frequency.

 

[It's Snake Pliskin]

Ok, yes it is hypothetical Mr Gorilla.

tech thanks for the link.

What is your opinion on a 95% winning system that has A: a high trade frequency? or B:a low trade frequency? This could apply to the 60% system too.

 

[tech/a]

A no brainer.

"A"

 

[MS+Tradesim]

Snake, I have to echo WayneL 100%. Win rate on its own has no meaning. It's difficult to give any meaningful thought to it unless we also know at least R:R and hopefully maxDD and opportunity.

 

[It's Snake Pliskin]

Snake, I have to echo WayneL 100%. Win rate on its own has no meaning. It's difficult to give any meaningful thought to it unless we also know at least R:R and hopefully maxDD and opportunity.

Thanks Tradesim.

 

[It's Snake Pliskin]

Depends what (average win/average loss) or R/R, is.
Once you have both win rate and R/R, then you can calculate the mathematical expectancy of the system using:

Expectation = Pw*Aw - Pl*Al

Where Pw = probability of win (60%)
Pl = probability of loss (40%)
Aw = average win (x)
Al = average loss (y)

If this is positive then the system provides an edge or a positive expectation and is expected to be profitable over many trades, which is good

Niz,
Theory aside was the intent here.

Maybe so, but what about using leverage and length of drawdown, and yes, trade frequency?

Thoughts only........

How good is a system if it is only active for part of the year?

 

[Pager]

My

Win rate is one of the last things I look at, obviously you need some to be successful though!, Risk/Reward is by far the main area to look at, as to drawdowns, look at them also and how often they occur, to some extent though these are an occupational hazard IMO and there is no fool proof way of avoiding them.

From my experience the higher the win rate the higher the risk needed to capture those winning trades, this means if applying money management your trade size is smaller if you want a higher win rate, no brainer as far as im concerned, risk as little as possible and load up, on the few winners you get, don’t let go until your system rules tells you to close a position.

As to frequency of trades, then I want as many trades as I can regardless of win rate, would much rather trade a system with 10 signals a week with a win rate of 35% than once or twice a week with 60% win rate.

Cheers from a very wet and wintery England, thought i would come in July to escape the Sydney winter

Pager

 

[theasxgorilla]

How good is a system if it is only active for part of the year?

Probably depends on the average duration of your winning trades. Luck is an understated factor IMO.

 

[MattR84]

Try using this backtester.

http://www.backtest.org/

Takes a little while to get used to but once you get the hang of it you're sweet. A 60% win rate for a good mechanical investing strategy is pretty good. The ones I punch in tend to get around 70% but thats with a couple of screens that leave only huge companies.

Overall it all comes down to the screen. A 60% win ratio on smaller stocks is more than enough and will give you an annual average return of up to 30% if you use a good one.

Matt

PS - It uses US stocks but the results should be pretty close to the Australian market returns. Dividend yield screens may be different. Just thought I'd let you know.