Forum Archive Index - August 2002

[Phaedrus <Phaedrus@techemail.com>]

Bertie,
        You ask "What sort of win/loss ratio is possible with good TA?". Don't 
focus too much on the win/loss ratio - it is not as important as you think. 
What affects your return is the combination of (1) Hit Rate (Ratio of Winning 
Trades:Losing Trades) (2) Ratio of Size of Average Win:Size of Average Loss  
(3) Number of trades. 
 Many very profitable systems have surprisingly poor hit rates, with perhaps 
only 40% of trades being profitable. You may be wrong 60% of the time, but if 
your average win is twice the size of your average loss, you have a profitable 
system. My hit-rate is about 60% (40% of my trades are losses). This is not to 
say that someone with a better hit rate would make more money, or that someone 
with a lower hit-rate would make less. Far from it.
 
 "What sort of average return can I expect on my investments with a sensible 
trading system etc?" An achievable aim would be to beat the Index. If you think 
this is too easy, expecting too little, or aiming too low, consider the 
following :- (1) Most new investors lose money, whatever system they use. (2) 
Most managed funds fail to even equal the Index, let alone beat it. 

 "How closely are predicted returns in Metastock backtesting matched by actual 
returns?" Correlations range from close, right through to no correlation at 
all. While good backtest results do not guarantee future success, poor backtest 
results virtually guarantee failure. One way to manage this problem is to split 
your data into two sets. Setup, backtest, and optimise your system using the 
first set. Then apply the optimised parameters to the second set. Judge your 
system by the second set of results. This approach avoids the potential hazard 
of curve-fitting. 
 
 "How rigid should one's system of selecting stocks to trade be, i.e. should 
you reject a possible trade because one indicator gives a less-than-positive 
signal?"  There is no simple answer to this question, because it is a matter of 
risk versus reward. The fewer signals you act on, the earlier you will buy, the 
more risk you will run, the more you will make if you are right, and the more 
often you will be wrong. At the other end of the continuum, if you waited until 
absolutely everything was perfect (assuming that were possible) you would miss 
many profitable trades, and be entering late into any that did qualify. You 
would not only be slow getting in, but also slow getting out. I have a friend 
who does not make much money on the sharemarket. He looks for trades with an 
absolutely perfect setup. (He has also never married, and at 49 is still 
looking for the perfect woman)

         Regards,
                      Phaedrus.

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