Why I Prefer Systems With A Low Winrate

Why I Prefer Systems With A Low Winrate

Imagine, your strategy is a Tesla, full of electronics and complicated technology. And now imagine, your strategy is an old Audi 100, zero electronics. Both are driving a race, not to reach a finish line, but to measure who can go longer without failing completely. The race takes place in the West of China, not one service station for hundreds of miles. In both cars, there is a clone of you sitting – with zero knowledge of car mechanics and/or technology. You do have a smartphone with mobile internet, however, to look up information when needed.

Who would you bet on?

Easy. Always the Audi 100 guy. ALWAYS. Why? Because he is basically driving an antifragile car. While the Tesla might purr like a cat and go for 10.000 miles without a problem, it’s systems are not antifragile at all. Every single part of the Tesla is vital to the survival of the whole car. If one part fails, the whole car fails, spectacularly. And you have no chance to fix it on your own, ever, not even with knowledge from the internet. The Audi, however – assume, the radiator is leaking. Put an egg in it, fixed. At least for a while, until you come to a village and can fix it more professionally.

The parts of the Audi are much more fragile, which makes the whole system antifragile. Yes, single parts might fail, but they can also much easier be fixed. It will take you longer to make the same mileage as the Tesla, and it will be more uncomfortable, but ultimately, you will prevail.

It’s the same with nuclear power plants. They work for decades, until they don’t. And then boom goes the party, because one pressure release valve has a dysfunction or whatever.

Now apply that same principle to trading systems. The Tesla is the high winrate system, the Audi the low winrate system. With the Audi, you will fail more often (have to fix a part), but ultimately, your reward is much higher, because you will be driving a lot more kilometers than the Tesla over the long run. With the Tesla, you will feel great 99% of the time, but when the shit hits the fan, it hits the fan big time, in other words, your risk of total failure is very, very high.

Build failure into your system. You are human. Humans mess up. You need wiggle room when executing your strategy. If you trade a 90% winrate system with an RRR of 0.2:1, you are profitable, but there is not a lot of room for failure, at all. You need to perform every single trade at 100% capacity, no excuses. If you only deviate from your strategy one bit, your whole statistical advantage will be gone and you will bust your account in no time. The pressure to perform is immense.

On the other hand, with a winrate of 40% and a 2:1 or 3:1 RRR, your winrate can fluctuate by as much as 10% or even more, and you will still be making money. You have a lot more room to fail and also to adjust, which makes your system a whole lot more antifragile.

This is also the reason, by the way, why most high winrate low RRR systems are traded by algorithms, not by humans. Algorithms are much less likely to mess up, but again, if something goes wrong, it will go wrong in spectacular fashion. Especially if we are talking about HFT outfits.

You might think that high winrate systems are easier to cope with as a human – really? Do you really want to work for a whole day, just to have all your winnings wiped out with the first trade the next day? Or do you want to plan your trades like a grandmaster of chess, and watch your plan come together slowly but surely, over time? Trust me, that is MUCH more rewarding.

Additionally, the markets are a highly dynamic environment that constantly changes. High winrate systems are fitted very closely to the conditions the market has to offer, which is why they need to adapt much more often than antifragile systems with low winrates but higher RRR’s.

So when creating your system, or trying to improve it, ALWAYS go for the yield. Try to improve your RRR in a logical way, but NEVER try to improve your winrate. Just trust me on this one. It pays off a lot more to improve yield than to improve winrate, especially in the long run. And we are all in this game for the long run.

This will also prepare you much, much better for extreme events like black swans, as you are used to single parts of your system failing constantly, which makes the whole system simply a lot more robust.

If you start thinking like this, it will also be much easier for you to stop system hopping and to analyze your winners for whether you could have gained more, instead of analyzing your losers whether you could improve your entry signal. Forget about the entry signal. Even random entries can make money if managed properly.

The next time you experience a losing streak of 10 trades, just remember that you aren’t sitting in a Tesla, you are sitting in an old, trusty Audi 100. Slow and steady wins the race.

PS, I am a huge fan of both Tesla and Audi, please don’t sue me, Elon.

 

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Comments ( 9 )

  • Sam

    Hi, Moritz,
    Have not seem your post for awhile. Good to see you back and brand new website.
    Thank you and Rolf for generous sharing of knowledge in the past 2017. I wish you all the best.

  • Roy

    I have a system that weans about 40% last time i checked i actually wanted a higher win rate, but after reading this article i feel so much better knowing i can still be profitable with such a low win rate………….an audi 100 🙂

    • Moritz

      The Audi 100 is an awesome car after all :))
      Cheers Roy!
      M

  • Colin

    Could’t agree more! My strategy has a win rate of 31%. Yes, there are longish losing streaks/drawdowns but stops are relatively tight and when it wins it tends to win big in relation to the losing trades. Overall the expectancy is around 0.93 – so very profitable!

    • Moritz

      Great job Colin!!

  • Choki

    i have been trade 4 year and it sux…i try to find almost perfect setup…but now i my winrate 30%-40% of winrate with 5:1 …now i did not care if i lose…in the end the result is profitable 😀

    now i can control my emotion,stress,and doubt with my trade system…

    loss doesn’t mean my setup broken or need to change/repair… it just loss ..keep calm and cut loss 🙂

    • Moritz

      Awesome, choki! Keep up the good work 🙂

  • Vollero

    Hello Moritz,
    I’m very new to trading and am glad I’ve had a chance to read through some of your articles. Based on all the positive feedback you get I’m more confident with your strategies and knowledge. I do have a full-time job not relating to trading at all and was wondering if these strategies would work for someone like me. It seems with a lower winrate I would have to be checking on the market status more often. I would appreciate any tips or references from you or any other experienced trader. Thank you for the articles so far. They are written well and make sense to me so far. In it for the long run.

    • Moritz

      Hey Vollero,

      thank you for the great feedback! No need to check markets more often with a lower winrate as opposed to trading with a higher winrate. And yes, Daily charts are probably pretty much the only choice for people with a full time job :).

      M

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