Imagine, your strategy is a Tesla, full of electronics and complicated technology. And now imagine, your strategy is an old Audi 100, zero electronics. Both are driving a race, not to reach a finish line, but to measure who can go longer without failing completely. The race takes place in the West of China, not one service station for hundreds of miles. In both cars, there is a clone of you sitting – with zero knowledge of car mechanics and/or technology. You do have a smartphone with mobile internet, however, to look up information when needed.
Who would you bet on?
Easy. Always the Audi 100 guy. ALWAYS. Why? Because he is basically driving an antifragile car. While the Tesla might purr like a cat and go for 10.000 miles without a problem, it’s systems are not antifragile at all. Every single part of the Tesla is vital to the survival of the whole car. If one part fails, the whole car fails, spectacularly. And you have no chance to fix it on your own, ever, not even with knowledge from the internet. The Audi, however – assume, the radiator is leaking. Put an egg in it, fixed. At least for a while, until you come to a village and can fix it more professionally.
The parts of the Audi are much more fragile, which makes the whole system antifragile. Yes, single parts might fail, but they can also much easier be fixed. It will take you longer to make the same mileage as the Tesla, and it will be more uncomfortable, but ultimately, you will prevail.
It’s the same with nuclear power plants. They work for decades, until they don’t. And then boom goes the party, because one pressure release valve has a dysfunction or whatever.
Now apply that same principle to trading systems. The Tesla is the high winrate system, the Audi the low winrate system. With the Audi, you will fail more often (have to fix a part), but ultimately, your reward is much higher, because you will be driving a lot more kilometers than the Tesla over the long run. With the Tesla, you will feel great 99% of the time, but when the shit hits the fan, it hits the fan big time, in other words, your risk of total failure is very, very high.
Build failure into your system. You are human. Humans mess up. You need wiggle room when executing your strategy. If you trade a 90% winrate system with an RRR of 0.2:1, you are profitable, but there is not a lot of room for failure, at all. You need to perform every single trade at 100% capacity, no excuses. If you only deviate from your strategy one bit, your whole statistical advantage will be gone and you will bust your account in no time. The pressure to perform is immense.
On the other hand, with a winrate of 40% and a 2:1 or 3:1 RRR, your winrate can fluctuate by as much as 10% or even more, and you will still be making money. You have a lot more room to fail and also to adjust, which makes your system a whole lot more antifragile.
This is also the reason, by the way, why most high winrate low RRR systems are traded by algorithms, not by humans. Algorithms are much less likely to mess up, but again, if something goes wrong, it will go wrong in spectacular fashion. Especially if we are talking about HFT outfits.
You might think that high winrate systems are easier to cope with as a human – really? Do you really want to work for a whole day, just to have all your winnings wiped out with the first trade the next day? Or do you want to plan your trades like a grandmaster of chess, and watch your plan come together slowly but surely, over time? Trust me, that is MUCH more rewarding.
Additionally, the markets are a highly dynamic environment that constantly changes. High winrate systems are fitted very closely to the conditions the market has to offer, which is why they need to adapt much more often than antifragile systems with low winrates but higher RRR’s.
So when creating your system, or trying to improve it, ALWAYS go for the yield. Try to improve your RRR in a logical way, but NEVER try to improve your winrate. Just trust me on this one. It pays off a lot more to improve yield than to improve winrate, especially in the long run. And we are all in this game for the long run.
This will also prepare you much, much better for extreme events like black swans, as you are used to single parts of your system failing constantly, which makes the whole system simply a lot more robust.
If you start thinking like this, it will also be much easier for you to stop system hopping and to analyze your winners for whether you could have gained more, instead of analyzing your losers whether you could improve your entry signal. Forget about the entry signal. Even random entries can make money if managed properly.
The next time you experience a losing streak of 10 trades, just remember that you aren’t sitting in a Tesla, you are sitting in an old, trusty Audi 100. Slow and steady wins the race.
PS, I am a huge fan of both Tesla and Audi, please don’t sue me, Elon.
