I do understand that sim isn't the same as live but I do want to be profitable in sim before I even attempt to be profitable live. I know there's a big debate on whether sim is good or bad and the good side of the argument persuaded more than the bad. I know the numbers won't be the same, but I want to get to numbers that are 'good enough' to go to live with.
Let me introduce you to the probability of ruin matrix
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The probability of ruin matrix is a calculation based on several pieces of data. First, it assumes 100 events; in this case that would be 100 trades. Next, it defines ruin as 50% drawdown from starting equity. Last, it assumes that the methodology used to initiate each event is always the same in every event; in other words each trade done during the 100 trades in the sample set is executed for exactly the same reason.
According to this matrix, if you do 100 trades, and have 42% winners and pull two dollars out for every dollar you give back, your probability of ruin is a little less than 14%. If you calculate the numbers yourself you will find that (42 x 2) - (58 x 1) actually yields a profit of $26, but the ruin matrix is using the full scope of probability theory. That includes the possibility that all the losing trades will come in the first 50% before the sample set of 100 trades is complete.
Notice that a high percentage of winning trades is not an indication that you will make money net in your account. Someone who has 55% winning trades to losing trades has a worse risk of ruin if he wins about the same amount as he loses every time. It actually has a better probability for your account if you have fewer winning trades but hold those winners for a higher profit/loss ratio. Of course, the best of all worlds is to be in the far right side of the matrix. A trader with 60% or more winning trades and only a slightly better profit/loss ratio than 1:1 has no chance of ruin.
You have a lot to learn and a long, long way to go. I'll see what turn this thread takes as I have a feeling you won't be around for very long. And I mean that in the nicest most sincere way possible!
- Trade what you see. Invest in what you believe -
Thanks a lot for this post, I was familiar with the expectancy model but not so much with the probability of ruin matrix. Seems like expectancy model is more for traders with consistent numbers month over month, while this is more applicable to new traders such as myself who want to ensure they survive the roughest patch of day trading. One thing to add to the equation is that mathematical models only take into account the numbers, and not the person.
I have a main takeaway from your post, assuming that my initial goal is capital preservation and not profit optimization.
38% win is too low, even with this profit/loss ratio, I should be aiming for at least a 45% win and a 2-1 ratio before switching over to live. This gives me a minimum target to strive for, so I appreciate that.
A 5% chance of ruin in ~a month seems more than reasonable to me (I do about 110ish trades per month atm). Especially once you add in the human factors that the model cannot account for.
Plus you have to be physically there to see and enter the trade. I miss maybe 20% of my opportunities for one reason or another. Sometimes as a trader you also switch off a little (tired, sick, no interest) and this is when you step back for a while and miss trades.