Would You Rather?

I've heard there are (ahem) other versions of this game, but we're just going to talk about trading.

First, it doesn't matter if you trade a robot or trade discretionarily, and it doesn't matter if you use one of my robots or trade your own system.

Anyone can play.

All you need is a few details about your system. And since I have a lot of details on my systems, that's what we'll use for today's game.

Okay, here's the question:

Would you rather be profitable and have huge winning streaks,

or would you rather lose more often and make more money?

No, no, no. You answered too fast. It's not that easy.

The easy answer is: Make more money! Don't do that (at least, not just yet). Think about it for a second.

We all vastly underestimate what it feels like to lose. It's one thing to look at a loss on a spreadsheet and say, "No big deal." It's another thing entirely to check your computer and see your account lower. Sometimes it's a lot lower (if you trade big size). Make no mistake, there's a difference between a paper loss and a live-account loss.

Think of it another way. What would it be like to look our computer and see win after win? What's more, what would it be like to see win after win...with big trade sizes? What if our system used stoplosses, so we could jack up our trade size and still see winning streaks?


Let's get specific.

Let's take a daytrading robot that uses targets and stoplosses, and then let's play Would You Rather?

System One has a tiny profit target that's easy to reach. It also has a set stoploss, so losses are limited. What would that get us?

  • System #1 on a hypothetical $10k account:
  • Profit=$74,000 ; max drawdown=-$3,700 ; most consecutive wins=136; most consecutive losses=4.

Whoa! 136 wins in a row? Great Odin's Raven! And by the way, it also had streaks of 33, 40, and 51 wins in a row.

Now let's look at System Two. It has the same methodology but a bigger, harder-to-reach, profit target, and also a bigger stoploss. What does that look like?

  • System #2 on a hypothetical $10k account:
  • Profit=$110,000 ; max drawdown=-$4,400 ; most consecutive wins=18; most consecutive losses=4.

Sure, there's more profit on System #2. But there's also a lot more losing. System #2 has a win rate of 78% while System #1 wins 89% of the time.

And that's the crux of this game.

We can make more money with System #2, but guess what? We don't make more money if we throw the system out after a losing streak!

On the other hand, when we have a 100-trade winning streak, what's the likelihood we'll give up after a loser or two? Who could go through 50-100 winners in a row and then throw that system out?

The only way System #2 wins in the end is if we stay in the game. If the stoplosses scare us out, then that system loses.

It seems fair to say that System #1 would keep us in the game, which makes it the winner (most likely the opposite of what we initially chose).

So, two trading systems walk into a bar. One makes more money. The other is a lot more fun.

Who would you rather go home with?

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