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At 09:41 PM 6/29/99 -0500, you wrote:
>If there is in fact a system that is %80 / 1 on 1, and if that system
>traded once per week, the system should give a return of (0.8 * 1) - (0.2 *
>1) = 0.8 - 0.2 = 0.6. This would be multiplied times 52 weeks, or 52 * 0.6
>= 31.2. Therefore, given the %80 probability of this system with a %60
>return, one could expect to gain, given 1 trade per week, with 1 years
>trading, placing $10,000 on each trade, 10,000 * 31.2 = $312,000. If one
>decided he wanted to own the universe in a few years, simply re-investing
>the profits in each trade would result in a balance at the end of 52 weeks
>of
>10,000 * (1.6) ^52 = $411,376,139,330,300. Not bad for a years trading.
>That is 411 Trillion. I would submit if this system actually does exist, I
>would certainly like to look into it, to see if I would possibly be
>interested in using such a system.
>
>Kohath
>
Kohath,
That would be perfect. But I suspect Ira's system is not mechanical. His
performance is more in line with a very experienced discretionary trader.
Mechanical systems usually require every signal to be traded, and the
parameters in your example assume trades of equal size, and zero slippage
or vacations..
A discretionary trader would not trade the same size all the time (usually),
and his losing trades might sometimes be larger than his winning trades.
so even with a 1:1 risk/reward ratio, the size of a losing trade can
dramatically reduce overall profits.
Also, I'm not sure how Ira calculates the risk:reward ratio. Perhaps he
has a profit:stop-loss ratio as 1:1, or 3:1 (depending on the example
above). But the actual trade execution price may not match that initial
risk-reward ratio, profits/losses could be different from that ratio. The
quoted risk:reward ratio may be the ratio at time of trade entry, the
trade parameters, but may not match actual results.
And then there is the effect of reality. Even with the most spectacular
system (mechanical or discretionary), reality will bite hard when it
does... For example, reinvesting the profits in your example is doomed
to fail, because the trade runs into liquidity problems, one day he
tries to close his position and no-one is there to take the other
side of the trade, so his entire profits for the year are lost...
Just thought I'd throw in some complications for our education/entertainment..
Ira, do you care to explain?
-Neal.
-----------------
Neal on the 'net.
Trade well. Train hard.
http://www.halcyon.com/neal/
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