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Breakeven Stops: At Entry or 1-2 Tic Profit?

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centaurer View Post
But this formula (Win% x Avg Win) - (Loss% * Avg Loss) is highly flawed for the statistical properties of trades. This makes sense on an IID process that there is only one win/loss %. Then with an IID process the more samples you take the more informative the average win and average loss becomes.

This all breaks down with market data because the distributions change over time. The distribution of a trade for ES on Monday is not the same distribution as a trade on ES from early February bouncing out of the lows.

It is viewing the trader as the generating process as opposed to the market.

I had to look up "iid process":


I do think I agree (partially), for several reasons. The main one is simply that this formula gives you an "average trade" based on the group of trades you figured it for. While there's nothing at all wrong with knowing what your average has been (in fact I think it's a good idea), by itself it doesn't tell you important things like:

(a) How were the trades distributed? By this I mean essentially how consistently are they close to your average. "All tightly bunched up" means something very different from "all over the place." If the variation is large enough, the average number is semi-worthless, because a really big losing trade can still be in the average, and could also kill you. You'd want to know something like the standard deviation, but you would likely then run into the problem that your trades probably aren't actually distributed in a classic bell curve so the s.d. will mean less. This does not mean "don't use an average and/or a measure of deviation," it means "don't put too much faith in it."

(b) As @centaurer puts it, the actual distribution of trades (or let's say, of potential good trades) will change a lot with market conditions. Not only by day or month, but with anything else that can affect profitability -- are prices ranging, trending, high volatility, low volatility, etc. So your expectancy -- meaning, what you can really expect -- may not depend either on you or your method as much as the market at the time. One thing is certain, and that is that the market will change.

With all this said, I do think you should know your averages, and also how differing conditions affect them, and certainly how consistently you come close to your averages under different conditions.

I also think you should be fairly nuanced in how you look at and apply your past trade statistics. Use them, but recognize the often-changing context they came from and apply to.

(I wish I could be more conclusive about how to do that.... When I have it all figured out, I'll be sure to let people know .)


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