Friends who are interested in the "Probability Trend Trading System" can contact me on Weibo and I will share with you a complete mind map of the theoretical framework of the trading system.
The fifth article, "How to Build a Trading System," shows the backtesting of a short-term trading system within one month.
From the backtest performance, we can see that among the 14 profitable transactions, 10 of them had a profit-loss ratio of less than 1. If the stop loss space is appropriately reduced, the transaction profit-loss ratio should be improved, and there may be good performance in the long run.
So the stop loss conditions were modified.
Old conditions: Stop loss at the previous lowest point
New condition: Stop loss at the last preceding endpoint
(Here is an explanation of the concept of endpoints. In my trading system, if the middle line of five consecutive lines is the highest or lowest, then the extreme point of this line is the endpoint.)
After determining the new conditions, we backtested the same market again and found that the backtest curve achieved better results. So in the short term, the new conditions can be used as a baseline.
Here, let me talk about the relationship between the winning rate and the profit-loss ratio. These two parameters are very important in the trading system. The winning rate refers to whether each transaction is profitable or loss-making in the end. If it is profitable, it is a win, and if it is a loss, it is a loss. The profit-loss ratio refers to the ratio of the final profit amount of each transaction to the risk amount of a single transaction.
In the trading system, you can set a fixed profit-loss ratio, or use other profit-taking methods to obtain different profit-loss ratios each time. However, these two parameters are contradictory in most trading systems. A high profit-loss ratio is accompanied by a low winning rate, or a high winning rate is accompanied by a low profit-loss ratio.
For example, in a trend-following trading system, it may take multiple stop losses to capture a high profit-loss ratio market, while in a oscillating trading system, profits are accumulated by following multiple small profit-loss ratio victories. (Some subjective trading systems can achieve both high win rates and high profit-loss ratios.)
How to adjust these two parameters to make the trading system more in line with our trading habits?
As a simple example, suppose there are two trading systems:
Trading system A has a long-term winning rate of 70% and a profit-loss ratio of 1:2
Trading system B has a long-term winning rate of 30% and a profit-loss ratio of 3:1
In the same 100 transactions, the risk amount of each transaction is 100 yuan, so the final performance of the two trading systems is as follows
System A had 70 profits totaling 3,500 yuan, 30 losses totaling 3,000 yuan, and a final profit of 500 yuan.
System B had 30 profitable transactions totaling 9,000 yuan, 70 losses totaling 7,000 yuan, and a final profit of 2,000 yuan.
From the results, system B is more profitable than system A. It seems better to choose system B with a lower win rate but a higher profit-loss ratio.
But in fact, in addition to trading strategies, factors such as mentality, execution, and environment also play a role in the trading system.
During the execution of trading system B, 7 out of every 10 trades will result in losses, and there is a possibility of 7 or more consecutive losses. Can you keep a stable mentality at this time?
Moreover, B's profits all come from a few transactions with a very high profit-loss ratio. In reality, can he guarantee that he will not miss these trading opportunities?
Therefore, considering all factors, although the long-term profit performance of A is not as good as that of B, its execution difficulty is much smaller than that of B. Therefore, the profit and loss ratio and the winning rate are two parameters that need to be considered comprehensively.
