"What is the bare minimum win rate for a profitable strategy?"
By Dave Mabe
Here's a question from Marco C. (name used with permission, lightly edited for clarity)
Marco C.
What are the bare minimum critical aspects that make a trading system good enough for trading?
from my ignorance and limited experience
Reliably detect real strength and weakness of the market in real-time
Reliably select tradable assets with sufficient volatility and abundant liquidity
Responsible money management
The first point implies that a system that provides a win/loss ratio lower than 3/7 (43%) (being conservative) doesn't meet the eligibility criteria. This alone discards most of the teaching and advice regurgitated/glorified in the trading world.
Will successful backtesting provide confirmation for point 1?
Dave:
Win rate is overrated.
It's a common misconception among traders that win rate is an important metric.
Win rate is important, but it's the least important metric for your trading strategy.
I was reviewing my historical trading results from the early to mid-2010s recently.
During my most profitable years during that period, my win rate was between 36 and 38%.
(I've worked with profitable traders with even lower win rates.)
In the years with below average profit, I actually had a higher win rate.
So what should you look at to determine the strength of your strategy?
By far the most important metric is the equity curve.
You can create strategies with a variety of win rates, profit factors, etc, but have a smooth equity curve.
If you're thinking about win rate too much, you're making a mistake.
Do you want to be right, or do you want to make money? (Those are often in conflict.)
Good question, Macro, and thanks for sharing with the list.
-Dave
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