HOW-TO Achieve Stable Profitability?

2023年9月12日

After spending 5 years in the TradingView community, I occasionally encounter friends asking "which factor is more important for achieving stable profitability? Win rate or profit factor?" Today, I will briefly share my personal opinion for reference only. Generally, it is best to refer to those big shots who have gained huge wealth (of course, if these big shots are willing to share with you). As for myself, I am still exploring on this road, so what I say may not be correct.

To achieve stable profitability, both win rate and profit factor are important factors. Win rate refers to the percentage of profitable trades in trading, while profit factor indicates the ratio between each profit and loss.

A high win rate means that more trades will end in profit, which can increase the account balance. However, relying solely on a high win rate cannot guarantee stable profitability. Even with a high win rate, if small profits are gained each time but large losses are suffered, long-term stable profits cannot be ensured.

On the other hand, a lower but reasonable and controllable win rate combined with a higher profit factor may be more conducive to achieving stable profitability. In this case, although some trades are lost (low win rate), overall positive returns can be generated by letting winners continue to grow and limiting losers (high profit factor).

Therefore, considering these two factors in technical analysis is very important. Weighing them according to different market environments and personal preferences and adopting appropriate strategies to balance win rate and profit factor will help achieve long-term stable income.

When it comes to specific quantitative strategies, the main goal of optimization and improvement is to increase the effectiveness of signals and reduce win rate while increasing profit factor. The following are some areas for improvement:

1. Optimize long and short entry signals:
- Add more technical indicators or conditions to filter signals, such as adding better moving averages, improved relative strength indicators (RSI), etc.
- Use indicators of multiple time periods (MTF) to confirm signals, such as using long-term and short-term moving averages to confirm trends, and processing data from small periods with data from large periods. However, there are some drawbacks and difficulties here, as much information is lost due to the reduced sampling rate.
- Use price momentum indicators (such as MACD) to confirm signal direction and strength.
2. Improve Pyramiding logic:
- Add stricter conditions to limit the number and timing of Pyramiding to avoid overtrading. Overtrading is similar to indulgence. It feels good at the time, but its harm will be highlighted over time.
- Use dynamic Pyramiding strategies, such as Pyramiding based on volatility indicators or price trends.
3. Optimize long and short take profit signals:
- Use more reasonable take profit strategies, such as fixed percentage take profit based on volatility or dynamic take profit based on price trends.
- Consider using multiple target prices to set multiple take profit points to partially profit when prices rise. Each take profit is the end of a buy/sell transaction and must be re-initiated. Do not expect to make a big profit in one transaction (of course, you can, but the premise is to ask yourself whether your determination and mentality are strong enough). The basic principle of multiple take profits and re-opening positions is the principle of compound interest, which accumulates slowly. Don't underestimate the small profits accumulated over time, the results will surprise you.
4. Optimize long and short stop loss signals:
- Use more reasonable stop loss strategies, such as fixed percentage stop loss based on volatility or dynamic stop loss based on price trends.
- Use multiple stop loss points to set batch stop loss to reduce losses when prices fall.
5. Backtesting and optimization: There are many pitfalls in backtesting, and you need to know which ones can be used and which ones cannot.
- Use historical data to backtest, evaluate, and optimize improved strategies.
- Consider using optimization tools or algorithms to automatically find the best parameter combinations.

Again, I have limited ability, and the above suggestions are for reference only. Specific optimization strategies need to be adjusted and optimized according to specific markets and trading strategies. It is recommended to conduct sufficient backtesting and verification before actual trading to ensure the effectiveness and stability of the strategy. Also, luck is a factor in trading that you cannot ignore, and having good luck is also important. If a pie falls from the sky, you must catch it, but don't wait for it to happen and think that it is your own "ability," or you will fall into the trap and temptation of the market.

Secondly, let's talk about the basic principle of "profit and loss are from the same source", which means that in a period of time, the profit and loss of trading strategies are caused by the same set of rules and logic. In other words, profits and losses are derived from the same trading decisions and execution processes. After all, trading strategies, decisions, and executions are consistent systems. It ensures that profits and losses are caused by the same rules and logic. Of course, knowing this is not useful. The key is how to use this principle to observe and judge, so as to make the selection of trading strategies more reliable and predictable. "Profit and loss from the same source" actually provides a method for quantitative traders to evaluate and improve trading strategies. By analyzing the reasons for profit and loss from the same source, you can find the strengths and weaknesses of the strategy and carry out corresponding optimization and improvement.

Finally, after spending a long time in the community, I believe you can also see some people showing off their performance once in a while. For example, posting a picture of making 4 times the profit in one contract, which makes many people envious. However, after experiencing many trades in the market, the old traders who have seen a lot will not be excited at all. Because many people have experienced many trades and know the basic principle of "profit and loss from the same source": If someone can make 4 times the profit at once, it is either due to luck or strategy loopholes. When he blows up his account next time, you will not see him posting pictures to sell his misery, especially some KOLs. Truly stable profitable strategies are steady and can roll, not roll out. They roll snowballs, which also shape a mentality. This mentality can refer to the WeChat official account of Beijing Trader: From losing 70 to rolling to 60 million, there are almost no times when the entire position rises. Each big profit is only 1-2%, and a loss of 0.8% is called a blood loss! Whether it is a stock market crash or a receding tide, it always feels difficult for him to lose money! Then he only has one way to go, and that is to make money!

The "Art of War: Formation" from 2500 years ago once mentioned "Those who are good at war win without fighting, have no wisdom, no courage, no merit." Its original meaning is that people who are truly good at using soldiers do not rely on clever decisions or brave achievements, but on careful and steady operation to win. In fact, isn't it the same for trading? For achieving stable profitability in trading, this sentence provides some important inspiration, including careful planning and execution, long-term vision and persistent strategy, meticulous analysis and comprehensive consideration, and avoiding overconfidence and risky behavior. These principles and thoughts can help traders establish stable trading strategies and disciplines, improve trading success rates and profit potential.