THE HAnDbook of TECHnICAl AnAlysIstrading methodology of the system is in a period of synchronicity with the mar-
ket. This means that the system should possess sufficient trade units to withstand
extended periods of drawdown. Hence, the probability of survivability increases
with a smaller %risk per trade.
Instead of optimizing the system to withstand drawdowns during periods of
mismatch, the novice trader will start to drift by changing the technical entry/
exit rules and filters in order to match the new market behavior, which will in-
evitably change again. Professional traders understand this and resort to stricter
money management rules and filters instead of chasing the ever‐changing market
behavior by constantly re‐optimizing oscillators and indicators.
finding the r/r ratio for the lowest Minimum
Winning percentage
Every trader would like to trade a system with a low minimum %win. This means
that with only a low percentage of wining trades, the trader would still be profitable.
So what R/r ratio setup would allow for the lowest %win? Let us look at few
examples. What must R/r ratio be for a minimum win percentage of 50 percent?
1 1 0 5
1 1 0 5 2
2 1 1
1 1/( ).
( /. )
: (
+=
+==
=−=
→
R
R
R
that is, R/r which is thhe minimum R/r ratio for a breakeven setup)What if we reduce the %win so that we can win more easily, say to 20 percent?1 1 R 0 2
1 R 1 0 2 5
R 1 4
that is R/r 4 1 which is the/ ( ).
/.
, : (
+=
+==
=−=
→
5
mminimum R/r ratio for a breakeven setup)So, theoretically speaking, what is the lowest %win whereby it would be easi-
est and most effortless to be profitable? Answer: win% = 0 percent
1 1 R 0
R 8
that is R/r infinity 1/( )
, :
+=
=
→
This means that to be the most profitable, we must either:■ (^) Never take profit in a trade, or
■ (^) Have no exposure in the market (since a stopsize of 0 in the ratio R/r would
make R infinite).
Unfortunately, not taking profit is not a viable option in the real world. It is
interesting to note that the other option for achieving effortless wins in the market