$WCOQ| WhiteCoqInu

Trading mathematics 101 (not for beginners) Why High RR traders are highly overrated and why lower RR traders often grow their account a lot quicker Alright it's weekend, our trades are all stagnating now, $BTC high timeframe breakout long we called live on here is up well, the #Altcoin longs are up slightly and the trading challenge account longs are up slightly overall. Not much price change is going to happen IMO on weekend open so I decided to write a guide on some highly advanced, yet highly essential trading mathematics. Reason being because I see so many people always flash their high RR trades and shame on low RR trades, all power to them, it looks like a nice post and I would be a hypocrite to say I don't proudly show the high RR trades I achieve out of my live twitter calls from time to time. But I don't get them that often and I equally show my normal range RR trades. And so focusing on high RR trades only is wrong IMO and if a social media page is filled with that, that is a large red flag. On the contrary, whenever I see a trader close a trade on low RR, that's when I pay attention into his/her approach because taking profit on a trade at lower RR shows they are focused on making money, not necessarily looking flashy. 'Only the advanced trader regularly takes profit on a trade at low RR' And I'll explain why he/she does that, with cold hard data and mathematics. Let's get to it. Exploiting your edge properly The key is all about exploiting your edge properly. Let's say you found an edge in trading, whatever it may be. First of all, you need to know if your edge is an actual edge so you check if your expected value is positive. So you back test your edge, and during back testing, you aim for a high 2 RR (call this a high RR). You find that the win rate is 46.66%. Is the expected value positive? To calculate, simply find the average win and deduct by the average loss. So: Expected value = average win amount * chances of winning - average loss amount * chances of losing 2R * 46.66% - 1R * 53.34% = 0.3998R (call it 0.4R). So with these back testing results, on average, you get 0.4R gain per trade. Say you risk R = $1000 per trade, then you gain $400 per trade. The 0.4R is your edge, indeed positive, so you have a positive edge i.e. you make money. Let's say you back test the same strategy but with a 1RR target. Because you are exploiting the same edge, you likely find a higher win rate. Many trades that ended up at 1R-1.99R did not hit on the 2RR back testing results, yet they hit on the 1RR back testing results before hitting stop loss, hence, some of the losers of the 2RR back testing results turned into winners on the 1RR back testing results. Hence, it's only logical to say you win more trades using a low RR i.e. you get a higher win rate, in exchange for getting less money per win. And that is the key. Let's say the win rate bumps up to 70%. The EV now is 1R*0.7 - 1R * 0.3 = 0.4R. Ah, that's again 0.4R, the same edge. I did that deliberately because it's very typical for an edge to have a similar expected value regardless of at which RR your TP ends up. That's not always the case, there is an optimal to where to TP (at which R), but that optimal often creates a lot of overthinking, far too much overthinking IMO, and very very typically does not differ much as long as you keep a reasonable RR and do not divert to extremes (you stay within 1RR-4RR). That is exactly why I am making this post, to not overthink where to TP, and stick to the low side (closer to 1/ maybe 1.5 RR). I know it sounds lame, but if you follow along so far, keep reading. So using the same edge, we now have two types of traders. ➡️The 2 RR trader, who wins 46.66% of the time. ➡️The 1 RR trader, who wins 70% of the time. As just illustrated through back testing results. Both are expected to make an equal amount of money on average per trade. So why am I preaching that being the 1RR trader is often a lot better, despite twitter not daring to flaunt any trades under 2RR typically? Reason 1: the 2RR trader is far, far less consistent The definition of consistency in trading is to have less deep drawdowns/setbacks during your journey. A consistent trader will rarely lose 30% of his balance if he sticks to say low risks, say 3%, where a less consistent trader may make money, but experience deep drawdowns, not only hurting his balance, but also his confidence. Strategies don't work forever and after a full red month he may think 'does my strategy still work?' So to evaluate consistency, let's calculate the odds both have the chance to experience a 30% drawdown when they take 1000 trades. To keep things fair, they both risk the same amount of 3%, a reasonable amount. See screenshots below (Risk of Drawdown Calculator) ➡️69.9% for the 2RR trader ➡️ 0.8% for the 1 RR trader So, the 2RR trader has a much, much higher chance to draw his balance down a lot deeper than the 1RR trader, hence, he experiences a much, much higher chance to experience inconsistencies. Ponder on that for a second. I mean that is more than 70 times higher that the 2RR trader starts to doubt himself where the 1RR trader continues to relax and trade and make money along. So you may see your favorite influencers always showing his high RR traders, the twitter algo pushing one hit wonders, or where they make demo accounts, take hundreds of trades just to show one big RR trade and that one only, or make many accounts just to be on the leaderboards with one of them, which is the only one they show. In a highly competitive world where every inch of extra edge is limited, I promise you he/she blows up his account over 50 times more frequently (as just shown by cold hard numbers here) than if he would make things look more realistic, chose to be an honest person, show all wins and all losses, and go for lower RR. Ah, I miss the days of high transparency trading standards. Reason 2: the 1RR trader grows his account quicker Alright, using the same numbers, let's check, using the optimal risk to maximize growth (kelly risk), what the growth of each trader is after 100 trades if they both try to play things optimally. ➡️2RR trader, optimal risk is 19.99% (screenshot 3, below) ➡️1RR trader, optimal risk is 40% (screenshot 4, below) After 100 trades, starting with $100, and remembering that both have an expected value of 0.4R ➡️2RR trader, optimal R = 20%. Win results in +40%, loss in -20%. Using compounding, on average, the average trade is 1.4^0.4666*0.8^0.5334 = 1.037 i.e. 3.7% gain on average. So final capital is 100$*1,037^100 = $2,070 ➡️1RR trader, optimal R = 40%. Win results in +40%, loss in -40%. Using compounding, on average, the average trade is 1.4^0.7*0.6^0.3 = 1.086 i.e. 8.6% gain on average. So final capital is 100$*1.086^100 = $382,809 That's $2,070 for the 2RR trader And that's $382,809 for the 1 RR trader Conclusion High RR traders may look better on social media but they experience a lot less consistency and make a lot less money. I also didn't mention that lower RR offers you more frequency, as 1RR trades come along a lot more and are easier to justify than your once in a blue moon 10RR trades. That is why I recommend sticking to lower RR if possible, and will take any high RR trade if they comes along the way as a nice bonus, not, a focus. It's not the only reason why I have the consistent track record as you know it, but it's a solid part of it. Thank you, good night.

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