A Formula For A Winning Strategy...

charlesD

Member
53 3
Here is a formula to work out what it takes to grow your grubstake a thousand fold... this is a valuable formula that will help you work out how much you need to win and to set stops at a suitable level.

The inputs are:

S = how much you start with
E = how much you end with
W = number of winning trades
L = number of losing trades
U = average % of each winning trade
D = average % of each losing trade

For those not familiar with the mathematical syntax, * (asterisk) represents multiplication, and ^ (carat) represents to the power of, and / (forward slash) represents division

The formula is:

S * [(1 + (U/100)) ^ W ] * [(1 - (D/100) ^ L ] = E

So let's say you start with £1000, win on average 10% on each trade, and lose on average 3% on each trade. How much will you have after 100 trades with a win ratio of 30%? Then just enter the required inputs into the formula:

S = £1000
E = ?
W = 30
L = 70
U = 10
D = 3

£1000 * [(1 + (10/100)) ^ 30 ] * [(1 - (3/100) ^ 70 ] = E

~

£1000 * (1.1)^30 * (0.97)^70 = £2069.20


You can change the inputs for different scenarios:

Let's say you set stops which if triggered results in loss of 5% of your balance, and your win ratio is now only 20% (e.g 2 wins out of 10 trades), and your average win is still 10%, how much will you have now after 100 trades?

~

£1000 * [(1 + (10/100)) ^ 20 ] * [(1 - (5/100) ^ 80 ] = E

~

£1000 * (1.1)^20 * (0.95)^80 = £111.11!


As you can see, small changes can be the difference between winning and losing! In this case, a win ratio of only 2 out of ten and a slightly bigger stop loss of 5% results in large losses, whereas a win ratio of 3 out of ten and a 3% stop loss results in more than doubling your money after 100 trades. Both scenarios, however, assume you take 10% profit on each winning trade. You can change the values of W,L,U,D to see the changes in the final result.

Now you can use the formula to answer a question like: With a win ratio of 20%, How much do I need to win on each winning trade to break even after 100 trades using 5% stops?

We now want to find the value of U:

£1000 * [(1 + (U/100)) ^ 20 ] * [(1 - (5/100)) ^ 80 ] = £1000

Doing a bit of algebra:

Let (1 + (U/100)) = X

£1000 * (X)^20 * (0.95)^80 = £1000

(X)^20 * (0.95)^80 = £1000/£1000

(X)^20 * (0.95)^80 = 1

(X)^20 = 1 / (0.95)^80

LOG (X)^20 = LOG (1 / (0.95)^80)

20 * LOG (X) = LOG (1 / (0.95)^80)

LOG (X) = [LOG (1 / (0.95)^80) ] / 20

LOG (X) = 0.089105578

Inverse the LOG to get 1.227737663

To test the answer:

£1000 * (1.227737663)^20 * (0.95)^80 = £999.99


X = 1 + (U/100) = 1.227737663

(U/100) = 1.227737663 - 1

U = (1.227737663 - 1) * 100 = 22.7737663

So we now know that we need to make 22.77% profit on each winning trade to break even after 100 trades with a win ratio of 20% and setting stops at 5%.

If you haven't got a scientific calculator with a LOG function you can't answer questions like this.

If you can spot any mistake please let me know. Knowing stuff like this is vital if you want to win!
 

NVP

Legendary member
37,535 1,988
sounds great .....shame a human Trader has to manage them all ....jees theres always a catch ;)


N
 

WR1

Active member
206 9
K.I.S.S is another very good formula?
or is it too simple ?
 

counter_violent

Legendary member
10,514 2,784
You are splitting hairs CV are you not ?
Or does your double headed coin come into play ?

Well, it's old ground to cover, but in a nutshell, a series of 1000 coin tosses should produce a roughly 50/50 split, heads tails. A series of 1000 trades may produce a similar result, except that there is a cost of 1000 commissions which must be overcome...ie we need an "edge". Therefore, no edge = no possible chance of winning.

Hopefully, Shakone will be along shortly to give us a proper explanation and some numbers in support.
 
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