High win rate does not necessarily mean high net profit, right?!

This time,I would like to look at the backtest results from a mental perspective.

You may sometimes cheer up or feel down by the EA's profits.

Before operating, it is desirable to have an image of the profits and to prepare mentally not to be shaken.

Please imagine two EAs.

• Oneearns 1,000 yen every day.
• The other loses 1,000 yen every day, butwith a one-in-ten chance, earns 19,000 yen.

Which EA would you choose? I would choose the former.

The latter is mentally unpleasant to imagine as the daily 1,000 yen decrease could affect mental health.

I might become suspicious whether a day of earning 19,000 yen will really come and stop using the EA.

As already mentioned,

Net profit = Total number of trades × Expected gain

.

Furthermore,Expected gain is

Win rate (%) × Average winning trade − Loss rate (%) × Average losing trade)

.

It becomes mathematical, buta high win rate alone does not guarantee net profit.

An EA with a high win rate and average winning trade > average losing trade is ideal.

However, even with a low win rate,average winning trade being somewhat larger than average losing tradeandproducing net profitis possible.

Mental-friendly EA vs. hard EA

Here, back to the mental aspect.

The previous EAs both had a net profit of 10,000 yen over 10 days.

The former has a win rate100%, the latter has a win rate10%.

In this waythe EA with the higher win rate is more mentally favorable when net profit is the same.

A rough guideline is win rate of 40% or higher.

An EA with 100% win rate can be considered an EA without a stop loss, which was discussed in the third section, but I would like to ignore that here.

Also, when the average number of consecutive losses is extremely higher than the average number of consecutive wins,there are periods when the mental burden due to losses is heavy.

An EA with the most consecutive lossescan be understood in the same way.

AndEA with the largest maximum loss amount could lead to longer periods of negative equity for the portfolio.

Please refer to this report.

Test period is one year; PF is 1.19; drawdown is also 4%.

Societally, it looks good.

Before running this EA, set an image of the profits.

Whether you can enjoy it mentally or whether you can endure it.

Think about how many trades will occur from the period and number of trades.

For this EA,

• Over a year there will be 50 trades, so about one trade per week.
• Win rate is 34%, so roughly one win every three weeks.
• Within three weeks, two losses of 2,700 yen and one win of 6,200 yen.

This is not exactly a heart-friendly EA.

Unlike backtests,actual operation takes a lot of time.

Having your feelings shaken along the way is not good for you or for the people around you.

Identify whether it is a heart-friendly EA and operate with the right mindset!