Skip to content
Dave Mabe
Close menu
Dave Mabe

Profitable Strategy with 5% Win Rate - Realistic?

By Dave Mabe

Here's a question from Matt H. about a strategy he's working on for the challenge I presented a few days ago (name used with permission):

Matt H:

I have a strategy for the challenge based on a consolidation breakout.  I am a little unconfident, but the numbers are looking great and the equity curve, too.  

  1. very tight stop = 0.27 1min ATR.  The idea - catch the ones that go up and keep going.

  2. position size based off the stop - risking $100 per trade

  3. profit target is 27 1 min ATR or end of day

  4. It wins about 5% of the time but when it does it's huge.

Is this real?  Or am I missing something related to execution, or do you think my backtest might have a bug?

Dave:

This is a common situation for new traders.

You can create a strategy with backtesting that looks great on paper, but quickly falls apart when you trade it in real-time.

This is a classic example.

"Very tight stop"

That means there will be more slippage than usual - probably a lot more!

"position size based off the stop"

This is usually a good idea, but combining that with a "very tight stop" and you realize the position sizes will be large, magnifying the slippage even more.

(The profit target seems reasonable.)

But the biggest red flag here doesn't come from a metric in the backtest.

Even if the backtest matches reality perfectly (which it won't), this strategy would be incredibly tough to trade psychologically.

With only 1 of 20 trades profitable, there will be long streaks of losing trades.

Then imagine the winning trade comes along - and you miss it or get a partial fill.

Talk about frustrating!

These mental aspects are important - considering them as you create a strategy should be a crucial part of your process.

Thanks for the question and for sharing with the group, Matt!

-Dave