BSD
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I think one source of disagreement probably stems from different objectives:
If you want to generate a steady income then a scalping or very short term style is definitely very achievable where you have pretty high winning percentages.
That what those who talk about passion in trading are probably on about, a desire to feel knowledgable or confident through having lots more winners than losers.
On the other hand you have those whose main objective is not a regular income from markets, but instead maxinisng ones net asset value to the hilt, ie people who are really shooting for starting with very little and making a hundred million or more.
There are of course traders with proven track records who have high hit rates of say 70, 80%.
But all the evidence is equally clear that if you want not a stead yincome but to generate tremdnous wealth it is no longer about hit rate, it is then about risk / reward ratios.
Brett Steenbarger:
"...As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability...."
"William Eckhardt:
The Win/Loss Ratio
“One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance. …
What really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions seem to be crucial beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance.”
Market Wizards
Fellow Market Wizard Bill Lipshutz who now runs a hedge fund and was before that his banks single most profitable FX trader with a hit rate of 20, 30%.
Kenneth Grant, in "Trading Risk: Enhanced Profitability through Risk Control", depicts his experience as risk manager for some of the best and most successful hedge funds, amongst others Paul Tudor Jones funds and Steve Cohens SAC Capital, that:
Across all market conditions, traders, trading styles and time frames, one rule holds true:
10% of all trades inevitably account for 90% of profits !
If you could combine large sums of money with high hit rate AND good risk / reward ratios there would be evidence of that out there, but the evidence tells a different story:
It's either lots more winners than losers through scalping and generating good money but never joining the top dogs, OR it's forget about hit rate and shoot for the stars.
If you want to generate a steady income then a scalping or very short term style is definitely very achievable where you have pretty high winning percentages.
That what those who talk about passion in trading are probably on about, a desire to feel knowledgable or confident through having lots more winners than losers.
On the other hand you have those whose main objective is not a regular income from markets, but instead maxinisng ones net asset value to the hilt, ie people who are really shooting for starting with very little and making a hundred million or more.
There are of course traders with proven track records who have high hit rates of say 70, 80%.
But all the evidence is equally clear that if you want not a stead yincome but to generate tremdnous wealth it is no longer about hit rate, it is then about risk / reward ratios.
Brett Steenbarger:
"...As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability...."
"William Eckhardt:
The Win/Loss Ratio
“One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance. …
What really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions seem to be crucial beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance.”
Market Wizards
Fellow Market Wizard Bill Lipshutz who now runs a hedge fund and was before that his banks single most profitable FX trader with a hit rate of 20, 30%.
Kenneth Grant, in "Trading Risk: Enhanced Profitability through Risk Control", depicts his experience as risk manager for some of the best and most successful hedge funds, amongst others Paul Tudor Jones funds and Steve Cohens SAC Capital, that:
Across all market conditions, traders, trading styles and time frames, one rule holds true:
10% of all trades inevitably account for 90% of profits !
If you could combine large sums of money with high hit rate AND good risk / reward ratios there would be evidence of that out there, but the evidence tells a different story:
It's either lots more winners than losers through scalping and generating good money but never joining the top dogs, OR it's forget about hit rate and shoot for the stars.
