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Is it possible to beat 50/50 with equal risk/reward?
#476856
04/13/19 10:05
04/13/19 10:05

Joined: Jun 2018
Posts: 8
Raisinbran
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Okay, so I appreciate fixed TP and SL have been discredited in other posts, but if we imagine a system that targeted some predefined constant == takeprofit == stoploss, how possible would it be to achieve a win% of say 55%+ over a period of time? I just figured that if risk == reward (after commission, slippage, spread, rollover etc) and win% > 50, then surely the crazy old martingale system actually makes sense..? I've tried some very basic decision making algorithms but with my limited experience have only been using the standard indicators in my bots and have never yielded anything significantly consistent in WFO; something I painstakingly did in MT4 before I discovered the magic of Zorro. I note in the Zorro Manual it mentions something about a machine learning approach that was correct 57% of the time on EUR/USD H1 but can't really figure out under what conditions ( https://manual.zorroproject.com/ under Main Topics > Trading Strategies, the blue graph bit). But the question remains. Is beating equal risk/reward trading with fixed TP/SL possible?



Re: Is it possible to beat 50/50 with equal risk/reward?
[Re: Raisinbran]
#476937
04/25/19 15:28
04/25/19 15:28

Joined: Mar 2019
Posts: 4
Nexow
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Well, Raisinbran, I think you have some wrong hypothesis here:
First you are assuming that your signal win rate will keep constant in the future and I think this is a big mistake. Try to backtest your signal in different periods, i.e. from 20132015 and 20142016. Does it give you the same win ratio in both scenarios?
Second, you are not thinking on real execution issues. Even if your TP/SL orders are placed in a "equally" distance, at the end will be executed as market stop orders, so you should assume some slippage. Also, you are not counting trading costs: spread and brokerage commissions, and depending on the instruments you may have other additional charges. So in practise your theorical 5050 R/R won't be symmetric.
There are many kind of "Martingales", some of them interesting depending on the system. I recommend you to study them and to understand the exponetial risk increase of each one.
Cheers,



Re: Is it possible to beat 50/50 with equal risk/reward?
[Re: Petra]
#477188
05/29/19 04:47
05/29/19 04:47

Joined: Jun 2018
Posts: 8
Raisinbran
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The math is not wrong, the mistake is that the 0.41 are not from higher expected value but from higher investment. The martingale need $32 capital for surviving 5 losses. If you invest the $32 without martingale, you had $6 per trade for surviving 5 losses, so you have 0.6 profit per trade, not 0.41. So, martingale loses even with 55% win rate. Interesting, I hadn't considered this. Essentially for a given starting position size the martingale wins, but actually you can afford a much higher starting size for nonmartingale if we assume the same max loss for each. So after 100 positions at $1 each, max loss ~$32, martingale is up $41. Without martingale you can afford $6 each for the same maximum drawdown and that would yield 10 net wins at 55% win rate, which is $60. I guess the only difference there then is that with martingale the losses have to be consecutive, whereas without it the losses are cumulative and hence the max DD is much more likely since any given win only takes you one step back towards breakeven, whereas martingale would bring you back to + 1 initial position size (barring incidents after max loss). Although I'm not sure that last statement is entirely true In any case, thanks for your replies. I guess the only way to test this without nailing the theory is to run simulations over a large number of controlled trades with different position sizes for each strategy to balance out max DD as above. I guess R would be good for this but I'm not confident with it for now so it might have to be a basic excel bodge XD



