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>> In my opinion I have to agree with Van K. Tharp, author of
>> Trade Your Way To Financial Freedom. A great system will have
>> a high score defined as expectation times opportunity factor.
>> Expectation is basically the average win divided by the average
>> loss. Opportunity factor is the number of times the system lets you
>> trade within a predefined time period.
>
>There is one other critical factor: size.
That's taken into account in the benchmark.
>I have systems that make a fortune with straight-line equity curves
>and high W/L averages. But they might only average $2 a trade in the
>ES or NQ. That's useless.
Depends who you are. If you're a floor trader trying to scalp a few
pennies on hundreds of trades you might make in a day, that might be
attractive.
>You need an average trade that's high enough to cover costs,
>slippage, and the occasional mistake, data dropouts, etc.
When I mentioned "average win" and "average loss" above, I thought
it was understood that transaction costs and slippage were already
included.
>Also, Tharp's definition doesn't mention anything about win rate. In
>theory a low-win% system can work just as well as a high-win% system,
>but I'd want a reasonably high win %. I don't want to trade a system
>that takes 20 small losses for every win. Not only is it
>psychologically difficult to trade, it's too vulnerable to error.
>All it takes is one "oops" to miss that one win and ruin your results
>for a very long time.
That depends on your psychology. Scale traders don't have a problem
with small win percentages; they endure long periods of losses.
Keep in mind that 20 losses per win might be acceptable, however,
if you had confidence that the average win would be many times the
typical loss and the number of wins in a period is statistically
significant. If I could trade 20 per week, losing $100 each time,
and have confidence that each week I'll have one winning trade of
$20,000, I couldn't care less about the losing streaks.
--
,|___ Alex Matulich -- alex@xxxxxxxxxxxxxx
// +__> Director of Research and Development
// \
//___) Unicorn Research Corporation -- http://unicorn.us.com
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