Why Win/Loss Ratios Can Be Meaningless
Both major markets have continued
yesterday afternoon’s bin Laden-induced downdraft and are currently short on all
timeframes above three-minute as we go to press. The
S&P is hovering in the neighborhood of Monday’s opening lows, and all eyes are
on the current 820 area, a break of which may provide additional fuel to trigger
additional sell stops.
Yesterday afternoon’s action reinforced why I
coined the “TUBAT” term on the hourly chart, given its recent downtrend
stranglehold, on top of a daily downtrend and general market rhythms. You may
recall that “TUBAT” stood for Trust Until Broken and Tested, with emphasis on
“Tested.” OK, I admit it’s a rather silly way for adults to discuss the market,
yet the point remains that I’d like a whole lot more evidence than a price probe
or two to provide a trade premise with decent probability. The test score on
yesterday’s exam? Well, a “D” would probably be overstating things. For those
using lesser timeframe triggers off the midday test, the 13-minute never
triggered into a long reversal and the three — which momentarily reversed —
quickly stopped out for minimal risk.
This morning’s trade was also interesting for those looking to short using
three-minute triggers off Tuesday’s closing 13 & 60 downtrend supports, with a
third entry finally providing the desired result. The sequence also reinforced
my belief of why win/loss ratios can be extremely meaningless, much like shots
on goal can be meaningless in hockey. Looking at my own ES sequence (see chart
below), I took each entry, for two stops and a gain — resulting in what could
be considered a lousy 33% ratio, yet the largest stop was (1.50) and the largest
gain 5.25. As I’ve often said, the majority of traders won’t take the final
entry, which is often the entry with the greatest probability.Â
Could the market have continued to chop? Of course, and such a day will likely
result in a scratch or draw day, which of course is part of the natural course
of business and should be expected. Yet, any stop cost should be minimized so
long as entries remain as close to trade premise support as possible.
These trade sequences are the type of sequences and notation I expect during our
upcoming weeklong
“Virtual Pit” experience. For those that are interested, the session is
filling up quickly yet spots still remain.
ES (S&P)Â Â Â Â Â
Wednesday February 12, 2003 11:30 AM ET       NQ
(Nasdaq)
Moving Avg Legend:
5MA
15MA 60-Min 15MA
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Good Trading!
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