Thursday, March 19, 2015

Different but the same

I was looking at the performance record of a fellow trend follower today, and it showed once again that there is more than one way to skin a cat in terms of achieving overall performance.

To begin with, while we both follow trends, there are some clear differences in the way we trade. He tends to trade foreign exchange whereas I concentrate more on equities. He uses longer-term timeframes and parameters compared to my own approach. My aggressive stop methodology means that I am stopped out of more trades, a lot quicker than he is, but I am more prone to whipsaws.

The upshot of all this is that my profit factor is almost three times greater than his. But, his win rate is a lot higher than mine. So, in terms of expectancy, the figures come out reasonably comparable.

The only difference will be in terms of trading opportunity (refer to this post for more on the magic formula).

Normally you will find there is a trade-off in the metric of profit factor compared to win rate because of the general approach used. If you are able to improve one of those metrics, the other will deteriorate. The holy grail for a pure trend follower would be to increase the win rate to more than say 50%, without suffering a drop in the profit factor. However, while I have seen some trend followers attain a win rate better than 50%, generally speaking a trend following approach will win between 30%-40% of the time.

A lot of this will come down to your own preferences and beliefs, and no one will be able to say that either approach is wrong. As long as you can follow those rules which generate a decent positive expectancy while using good risk control, you will do just fine.

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