The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

Money Management

the Market‐Methodology Mismatch

Can we guarantee that a system will maintain a minimum win ratio of 1/(1+R)

indefinitely? Unfortunately, the answer is no. Although we have control over the

win amount ($R), we have absolutely no control over the winning percentage. The

situation is further exacerbated when the market changes behavior and we inevi-

tably see our system fall below the minimum 1/(1+R) condition. Every trading

system will have specific trading conditions with carefully tuned entry/exit rules

and filters. The original methodology will inevitably experience mismatch with

changing market behavior. The methodology will usually stay in mismatch over

much longer periods as the market cycles through its infinite range of expressions.

The system’s specific conditions for profitability usually occupy only a small part

of that spectrum of expressions and thus will stay profitable over smaller stretches

of activity. That is why it is so important to be able to maximize profit when the

figure 28.21 Techniques for Reducing Longer‐Term Risk.

figure  28.22 Calculating the Minimum Win Ratio or Percentage for a Fixed R/r

Ratio.