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What do you mean by high probability?

Is it 40%, 60%, 90%? Well, you can be profitable even if you only win 20% of your trades. You just need to make sure that your trades are at least 1:9. That way, one winning trade would wipe the other 9 losses.

Let us do an example. Over the course of a month you risked 1% per trade stop loss. You made 100 trades and for every 5 losses you win 1 trade. By the end the month, you are up by 80% despite losing 80% of the trades. This is because you risked 1 to make 9.

Does this means high risk to reward ratio is better? No. Why not?

Because you can make the same case for high probability. You can have a system that has RR of 9:1 and your probability of winning 80%. It would have the same result as the above.

Please correct me if I am wrong. Below is a real life example.

From 'Insights into High Frequency Trading from the Virtu IPO' by WSJ,

Assume a 51% win rate, a 24% lose rate, and 25% scratches. This implies an average

profit of

hPi = .51 × 0.01 − .24 × 0.01 = $0.0027/share .

Virtu’s IPO filing states that trading income from Americas Equities is ∼$440K/day,

and this is ∼30% of their recent total daily trading income across all instruments. Given the

above profit estimate of $0.0027/share, this implies that Virtu trades ∼160 million shares

per day. Current US equity volume is ∼5 billion shares per day, which would put Virtu at

∼3% of the US stock market. Volumes were somewhat lower during the period described in

the IPO, and so on many days, Virtu would have been ∼5% of the total US equity market.

It also suggests (if other major participants, e.g. Jump Trading, Teza Technologies, Tower

Research Capital, etc. have similar per-share profitability), that current HFT US Equity

income is of order $10M per day and $2.5B per year before fees and technology costs.

Is it 40%, 60%, 90%? Well, you can be profitable even if you only win 20% of your trades. You just need to make sure that your trades are at least 1:9. That way, one winning trade would wipe the other 9 losses.

Let us do an example. Over the course of a month you risked 1% per trade stop loss. You made 100 trades and for every 5 losses you win 1 trade. By the end the month, you are up by 80% despite losing 80% of the trades. This is because you risked 1 to make 9.

Does this means high risk to reward ratio is better? No. Why not?

Because you can make the same case for high probability. You can have a system that has RR of 9:1 and your probability of winning 80%. It would have the same result as the above.

Please correct me if I am wrong. Below is a real life example.

From 'Insights into High Frequency Trading from the Virtu IPO' by WSJ,

In the June 4th, 2014 Bloomberg article, Virtu CEO Doug Cifu states that “51 to 52%”

of Virtu’s trades are profitable. Given the granularity of trading by a market maker, in

which one is trying to win of order one spread ($0.01) per share, there is an unmentioned

subtlety in this statistic, because at first glance, it implies that 48 to 49% of Virtu’s trades

are unprofitable. The key point, however, is that if 51 to 52% of trades are profitable (i.e.

earn one $0.01 bid-offer spread per share), the remaining 48-49% must be apportioned

between trades that are unprofitable and trades that scratch out (have net zero profitability,

or which are very slightly negative due to exchange fees and SEC fees). For purposes of

order-of-magnitude estimation, we can assume that among the 48-49% of non-profitable

trades, approximately half will scratch out exclusive of fees, and half will lose of order one

spread.

of Virtu’s trades are profitable. Given the granularity of trading by a market maker, in

which one is trying to win of order one spread ($0.01) per share, there is an unmentioned

subtlety in this statistic, because at first glance, it implies that 48 to 49% of Virtu’s trades

are unprofitable. The key point, however, is that if 51 to 52% of trades are profitable (i.e.

earn one $0.01 bid-offer spread per share), the remaining 48-49% must be apportioned

between trades that are unprofitable and trades that scratch out (have net zero profitability,

or which are very slightly negative due to exchange fees and SEC fees). For purposes of

order-of-magnitude estimation, we can assume that among the 48-49% of non-profitable

trades, approximately half will scratch out exclusive of fees, and half will lose of order one

spread.

profit of

hPi = .51 × 0.01 − .24 × 0.01 = $0.0027/share .

Virtu’s IPO filing states that trading income from Americas Equities is ∼$440K/day,

and this is ∼30% of their recent total daily trading income across all instruments. Given the

above profit estimate of $0.0027/share, this implies that Virtu trades ∼160 million shares

per day. Current US equity volume is ∼5 billion shares per day, which would put Virtu at

∼3% of the US stock market. Volumes were somewhat lower during the period described in

the IPO, and so on many days, Virtu would have been ∼5% of the total US equity market.

It also suggests (if other major participants, e.g. Jump Trading, Teza Technologies, Tower

Research Capital, etc. have similar per-share profitability), that current HFT US Equity

income is of order $10M per day and $2.5B per year before fees and technology costs.

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