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Say you have a trading strategy that makes wins (i.e. profitable trading decisions) x% of the time. Is there a value for x at which the strategy can be said to be objectively profitable? Must that value be greater than 50, and if so by how much?

If it helps to simplify the question, suppose there are no real or opportunity costs associated with trading.

To simplify further, assume that the x% win rate never changes.

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    Not really an answer, but an observation: the question is not just whether it is profitable, but whether it is more profitable (or more often profitable) than some benchmark. If your strategy is profitable but not as profitable as the S&P 500, then it's probably not a useful strategy.
    – BrenBarn
    Commented Aug 5, 2015 at 20:20
  • I've significantly edited the question to be more objective and less opinion-oriented. The original wording left the question in danger of being closed as off-topic. (If you prefer the original, certainly feel free to roll back my edit.)
    – dg99
    Commented Aug 6, 2015 at 15:56
  • Sounds good to me
    – naz
    Commented Aug 6, 2015 at 15:57

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You can have a profitable trading system even if your win ratio is less than 50%. In fact my current short term strategy has a win ratio of 44% and I am up 22% since the start of the year.

What determines if your strategy will be profitable or not is the Trading System's Expectancy.

Expectancy = win ratio x average win size - loss ratio x average loss size

So the secret is to keep your losses small and let your winners run.

My aim is a win size:loss size ratio of 5:1, so if my maximum loss is 1% of my total capital on each trade, then I aim to make 5% on my wins.

You need to be very disciplined and believe in your system once you have backtested it, and have proper risk and money management strategies in place. Try to keep your emotions out of your trading and accept that not all of your trades will be a winner, learn to take a loss when the market moves against you, and your positive expectancy trading system will be profitable over time.

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    @keshlam - but what your aim is has nothing to do with this question, which is about trading systems. Just because you are stuck in your conservative ways does not mean everyone else has to be as well. If someone were to take up trading, then it is a free world, but I would rather they start by knowing what they are doing rather than just thinking it is so easy that anyone can do it without any learning and training.
    – Victor
    Commented Aug 5, 2015 at 22:30
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    @isquared-KeepitReal - why would the size of your winners be undetermined? If you buy at a certain price and you sell at a higher price, then you can always determine the size of your winners.
    – Victor
    Commented Aug 6, 2015 at 12:15
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    It would be the same thing with losses - you buy at a certain price and then sell at a lower price.
    – Victor
    Commented Aug 6, 2015 at 12:21
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    @Superbest - my short term strategy is to look for stocks with short term price movements (which could range from a couple of days to a few weeks) either going long or short. I will usually only take long positions if the market as a whole is moving up, and usually only take short positions if the market as a whole is moving down. I also have a longer term strategy which looks for up trending stocks for which I only go long and could be in a position from a few months to a few years. I use position sizing and risk management for both short term and long term strategies.
    – Victor
    Commented Dec 1, 2015 at 5:55
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    @Superbest - if you mean the falls in late August, I actually trade the Australian market not the US market, and the ASX200 fell about 12% from mid to late August. I got stopped out early on any remaining position in my longer term strategy and long positions in my shorter term strategy but made some good gains with some short positions I place in the last 3rd of August. So some small losses taken on long term strategy but some nice gains made on short term strategy. Currently in cash on long term strategy waiting for market to start moving higher before getting back in.
    – Victor
    Commented Dec 1, 2015 at 10:56
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I think you are thinking about this the wrong way.

Profitability is not about your per-transaction profitability "batting average" as much as it is your total profit relative to the mean over time.

If you make one transaction, and you make a profit, by your metric, your strategy is "truly profitable" because you have made a profit 100% of the time. Not a good metric.

Instead, what you really want to be thinking about first is what is your overall profit, and second, how it looks relative to the average.

In other words, if I make ten transaction that cost me each $1, but I make one transaction that makes me $100, I would say that my strategy would be profitable, since I'm now up $90. However, if an index fund would have made me $1000, I would say that my strategy was probably a poor one, because of the opportunity cost of other investments (even though my strategy was, by definition, profitable).

Now, look at how your strategy performs over time. Which is how you often look at funds: if I invested $X in MyStrategy vs IndexFund, and after a few time periods I would have $Y in MyStrategy and $Z in IndexFund, the measure of my performance is $Y-$Z.

Lastly, and most importantly, remember that past performance is no guarantee of future performance. A couple of good transactions does not mean your next couple will be good.

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As others have noted, what matters isn't what percentage of the time you have a gain, but your net gain. If you lose money 90% of the time but 10% of the time you win big, and the total wins are more than the total losses, you have a net winning strategy.

I think by definition, if at the end of a specified period of time you have more money than you originally invested, then your strategy is profitable. If you put $1000 in the market on January 1, invest no additional funds, and on December 31 you have $2000, your strategy was profitable. For that matter if you have $1001, your strategy was profitable.

Before you celebrate you'd want to compare it to other possible strategies. If your strategy gave a 10% net profit, but investing in Foobar Mutual Fund would have given you a 20% profit, then you would have been better off to invest in Foobar. With all the usual caveats about risk tolerance and so forth.

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