What has your hit and miss ratio been?

[damdin]

Hi guys,

I have a question from experienced punters or investors. I am just wondering what has your hit and miss ratio been since you have started punting/investing on stocks. I am just wondering if it is possible to keep hit ratio over 50% in the long term. What I am saying is how many times you call turned out to be right compared to total call (including wrong call) for each specific time frame target?

Cheers

 

[tinhat]

Hi guys,

I have a question from experienced punters or investors. I am just wondering what has your hit and miss ratio been since you have started punting/investing on stocks. I am just wondering if it is possible to keep hit ratio over 50% in the long term. What I am saying is how many times you call turned out to be right compared to total call (including wrong call) for each specific time frame target?

Cheers

I'm not a trader so I can't share any personal experience with you. My observation, from reading 'Unholy Grails' by Nick Radge is that most of the trading systems back tested for that book had a win rate under 50%. I think the greatest psychological challenge for a trader would probably be the draw down rate (how far and for how long can you endure a loosing streak and deciding if it is just down to chance or if your strategy is fundamentally flawed or if it still fits the market).

 

[brty]

How about, it doesn't matter.

Sorry, but the question really involves what you are doing to have any relevance. You could have a system that involves very small losses but adds to winners and have a 10% hit "success" rate but make a fortune over the longer term.

Likewise it is possible to have a great percentage of small winners, a few massive losers and be out of the game in a couple of years.

 

[damdin]

How about, it doesn't matter.

Sorry, but the question really involves what you are doing to have any relevance. You could have a system that involves very small losses but adds to winners and have a 10% hit "success" rate but make a fortune over the longer term.

Likewise it is possible to have a great percentage of small winners, a few massive losers and be out of the game in a couple of years.

Agree on the size of loss or win that render meaning of hit and miss ratio useless. However, based on the assumption the size of the win or loss is not considered given the you employ same exit strategy for every trade/investment if your call goes wrong. In other words if we leave out size of win or loss in this scenario, is it possible to keep winning ratio over 50% in reality for discretionary trading (not black box) in the long term?

 

[MichaelD]

given the you employ same exit strategy for every trade/investment...is it possible to keep winning ratio over 50%

Your exit strategy almost entirely determines your win-loss ratio, so yes you can set things up so that your win-loss ratio is greater than 50% in the long term.

The more above 50% your win-loss ratio gets, the bigger your losers become in relation to your winners.

 

[So_Cynical]

Its all about time, time allows the price to move, events to happen and cycles to play out, short time frames don't. Given an open time frame and a more investment skewed mind set it is possible to have a winning ratio of over 75%

Screen shot below is my main portfolio started May 2007, and i just sold my biggest loser last week.
~

 

[damdin]

Its all about time, time allows the price to move, events to happen and cycles to play out, short time frames don't. Given an open time frame and a more investment skewed mind set it is possible to have a winning ratio of over 75%

Screen shot below is my main portfolio started May 2007, and i just sold my biggest loser last week.
~

Thanks for the replies, guys.

I understand that if you initial call was wrong for a target time frame, then you can wait and turn that loser into winner after some time (of month, year etc.) when price turn around. What I really mean is that is there any chance to keep initial call correct persistently over 50% in the long term in reality?

 

[Julia]

I understand that if you initial call was wrong for a target time frame, then you can wait and turn that loser into winner after some time (of month, year etc.) when price turn around.

You seem to be assuming here that if you wait long enough it's inevitable the price fall will reverse.
Absolutely no assurance of that happening and in the meantime opportunity cost is increasing.

By cutting your losers quickly you can put that capital into something more healthy.

All these years after the start of the GFC the XAO is still about 1400 pts off the pre-GFC high.
If you sold even after the losses had started, sat it out in cash at much higher interest rates than we're seeing these days until confidence returned, you'd have been able to buy back about twice as many shares as you previously held.

 

[MichaelD]

What I really mean is that is there any chance to keep initial call correct persistently over 50% in the long term in reality?

Trading stocks long only with random picks and an infinite supply of money will see your win % sit at about 55% simply due to the long bias of the market overall.

You won't be very profitable, though.

But seriously, what is it about wanting to be RIGHT rather than PROFITABLE?


Here's a system which will see you 100% right but go bankrupt very quickly;

Trade futures long only with a profit limit of 1 tick.
Hold all losing positions.

You'll be 100% right but broke because you've blown up.

 

[damdin]

Trading stocks long only with random picks and an infinite supply of money will see your win % sit at about 55% simply due to the long bias of the market overall.

You won't be very profitable, though.

But seriously, what is it about wanting to be RIGHT rather than PROFITABLE?


Here's a system which will see you 100% right but go bankrupt very quickly;

Trade futures long only with a profit limit of 1 tick.
Hold all losing positions.

You'll be 100% right but broke because you've blown up.

Like I put in my first post, every losing position will be closed out on a strict exit strategy, so assuming the losses won't be big in these cases. On the other hand if the call is right then let profit run. So I am assuming if your call is more than 50% consistently right then you are in the money or would not you be profitable in long term?

 

[DeepState]

What I really mean is that is there any chance to keep initial call correct persistently over 50% in the long term in reality?

Yes, it's easy. But you're fooling yourself.

Here's how you do it. Sell deep out of the money options where the delta on the options are essentially zero. This is like selling an insurance policy on BHP collapsing into a sinkhole. The likelihood of making money on each trade is massive...as massive as you like depending on how out of the money the option is vs implied volatility and other matters. You can estimate the chances of making a loss through various methods. So, let's say you wanted a 99% HR, too easy. Sell 0.01 delta call options on XYZ and just wait. XYZ is anything with a heartbeat...stocks, bonds, currency. Derivatives upon those, derivatives on their correlations, blah blah. About 99% of those contracts will complete in your favour and you will keep your full premium.

Congratulations...99%HR. Pure genius. Wow...walk the block. Post your prowess. Buy a house believing you've cracked it.

The problem arises when that rainy day comes. The losses on that day when something big happens can erase all of the profits of the 99 other profitable trades. You see a hint of it in So_Cynical's figures. The losses when lost are greater than the gains when won. The more extreme you push your HR, the more extreme these ratios become. The super-senior CDOs held on investment bank balance sheets that internally consumed them in the GFC are an example of when happens when you push it to the max. You look sensational for years....until you don't.

Profit = HR x Slug ratio. Changing one impacts the other. You need to think of both. Ultimately, you need to have an edge. What matters is expected return per trade. HR and SR are just ways to slice that up. Some of the best investors in the world have HR well below 50%. Given the pain you feel on taking any single loss (regardless of extent...it's how the brain works..win/loss is different to actual extent in the way we 'feel' it), you can understand that people avoid situations where losses are common...and whaddya know, profit materialises.

All the best with that.

 

[damdin]

Ok I see now the point that it all comes down to the "edge", when to enter and when to exit or know what you are doing.

 

[DeepState]

Ok I see now the point that it all comes down to the "edge", when to enter and when to exit or know what you are doing.

It would be the sweetest thing if you found your edge amongst low HR strategies!

For avoidance of doubt, my mention of So_Cynical's figures are not in any way a negative criticism of his strategy or his outcomes as posted.

 

[MichaelD]

Like I put in my first post, every losing position will be closed out on a strict exit strategy, so assuming the losses won't be big in these cases. On the other hand if the call is right then let profit run. So I am assuming if your call is more than 50% consistently right then you are in the money or would not you be profitable in long term?

Your entry strategy has very little to do with your win % and is by far the least important aspect of a profitable trader's edge.

Your exit strategy sets your win %.

Your overall profitability comes from position sizing and money management.


A win % of 40% with winners left to run and losers cut short can be highly profitable.

On the other hand, as various of us here have pointed out, a win % of 99% can still be a disaster.


It is unlikely that you can get a win % much higher than 40% whilst at the same time cutting losers short. To get high win % rates requires giving losing trades a lot of room to come good.

 

[DeepState]

Your entry strategy has very little to do with your win % and is by far the least important aspect of a profitable trader's edge.

Your exit strategy sets your win %.

Your overall profitability comes from position sizing and money management.

A win % of 40% with winners left to run and losers cut short can be highly profitable.

G'Day

No argument on the above. But curious about your thoughts. [Others too]

1. You have mentioned or paraphrased the trader adage 'let winners run and cut your losers short' which is also something that Julia has posted a couple of times.
2. You have also discussed markets as essentially a supply of Brownian motion with drift entities.

What's your perspective on a rules based approach which terminates all trades when they reach neg x% to initiation and the indefinite (let's call it 10 year horizon to pick a number) holding period of winners? You can redeploy proceeds from investments cut short. Basically the straight up keep your winners and crush your losers strategy.

I ask, in part, because you have a psych bent. But it is also a straight up investment question.

Cheers

 

[MichaelD]

What's your perspective on a rules based approach which terminates all trades when they reach neg x% to initiation and the indefinite (let's call it 10 year horizon to pick a number) holding period of winners? You can redeploy proceeds from investments cut short. Basically the straight up keep your winners and crush your losers strategy.

Almost perfect. The only thing to improve on this is a trailing stop. Otherwise you'll have some of the big winners turn into losers.

eg A perfectly sound strategy is
"Buy at market"
"Sell when price drops 10% from the highest high since entry"

 

[DeepState]

Almost perfect. The only thing to improve on this is a trailing stop. Otherwise you'll have some of the big winners turn into losers.

eg A perfectly sound strategy is
"Buy at market"
"Sell when price drops 10% from the highest high since entry"

Appreciate your response. Hope you won't mind expanding a little because this concept is very impt to successful investing but loaded with magical thinking. I am hoping you won't mind letting a polite discussion unfold because I'd like to understand this in more depth.

To progress:

How is this perfectly sound relative to the alternative of no trailing/other stop? How does it improve your returns and return/risk, for example. Let's say we stay in your world of the market being a stream of Brownian motion entities with drift and we begin with 10 stocks at equal weight. Let's make this ultra simple and assume that all the stocks in the market have equal volatility, drift and zero correlation to one another. This is the most basic investment environment imaginable.

 

[MichaelD]

How is this perfectly sound relative to the alternative of no trailing/other stop? How does it improve your returns and return/risk, for example. Let's say we stay in your world of the market being a stream of Brownian motion entities with drift and we begin with 10 stocks at equal weight. Let's make this ultra simple and assume that all the stocks in the market have equal volatility, drift and zero correlation to one another. This is the most basic investment environment imaginable.

You're starting with a false assumption.

If you look at the distribution of returns from stocks, they do not show a Normal distribution. Instead, they show a return skewed with long tail profitable outliers.

A trailing stop is needed to take better advantage of the long tail profitable outliers.

 

[DeepState]

You're starting with a false assumption.

If you look at the distribution of returns from stocks, they do not show a Normal distribution. Instead, they show a return skewed with long tail profitable outliers.

A trailing stop is needed to take better advantage of the long tail profitable outliers.

Excellent. Thanks for the push-back. Let's move on.

I should have said "geometric Brownian motion" for clarity and to avoid ambiguity. The distribution looks like it has positive skew because you are not adjusting for geometric movement and seeing it in nominal space. But +100% is not the mirror of -100%. In the former, you double your money, in the latter you are toast and out. If you lose 50% you need to make up for it by earning 200%. That's why you think there is positive skew. But it's vapour. You need to transform that via the lens of a log-adjustment to get closer to the truth. If you did, you'd find a leptokurtotic, negatively skewed distribution that looks very normal otherwise. That's actually the polar opposite of your observation.

Nonetheless, even if people aren't aware of this, people use trailing stops etc. I am skeptical - not cynical. I use a kind of 'stop' that is of an entirely different classification, for disclosure. But I'm curious about these popular rules. We can be right even if we don't fully know why. I have no idea how my TV works, but I use it. Managing money is a little bit different to that, but I'll go with what works as opposed to theories which don't accord to reality. The fact that traders/investors do use this stuff suggests that there is some benefit...maybe. I'd just like to know where it is and why it works given it is so pervasive. Given how widely it is used, it should be obvious...but it isn't to me - beyond soothing your amygdala and adrenal system. Hope you can help.

If you prefer, we can take this off the thread. But I'm hoping to hear what others may think too.

 

[MichaelD]

But +100% is not the mirror of -100%. In the former, you double your money, in the latter you are toast and out. If you lose 50% you need to make up for it by earning 200%. That's why you think there is positive skew. But it's vapour.

Trading shares long only without a trailing stop.

1 position - maximum loss is 100%
1 position - maximum profit is infinity

The same with a stop

1 position - maximum loss is < 100%
1 position - maximum profit is still infinity