It seems a popular belief that if you look at the stats of the majority of profitable short-term systems the Reward:Risk ratios are normally low (1:1, 2:1, etc) whilst the win rate percentages are normally high (70%+ from what I've read). In constrast, profitable longer-term systems generally seem to exhibit the opposite; higher Reward:Risk ratios but with lower win % (anything around 40%-50% doesn't seem uncommon).
Although I haven't spent any time developing short-term systems, my own experience with longer-term systems seems to echo this view.
Consequently, my question is why is this normally the case, and more importantly why can't a longer term system also generate a high win rate %?
To expand this further I'd like to focus on what contributes towards a higher Win Rate %. IMO Possible contributers could be:
1. The reliabilty of the actual entry signal must be very good to begin with. By reliable I mean that the possibility of the trade moving in your favoured direction AT LEAST past the BREAK-EVEN POINT must be v.high.
2. A target stop is maybe being employed which would limit the R:R. However, given that the only 2 exit outcomes are either (i) Target stop being hit (resulting in a Win) or (ii) Initial Stop being activated (resulting in a Loss), then point 1 (reliability of entry signal) still needs to be met to achieve a high win rate, therefore a target-stop probably doesn't contribute that much towards a higher win rate.
3. Using a Break-Even stop, which if activated would result in more "slight profit" or simply "scratch" trades as opposed to actual losing trades.
4. Using a tighter trailing stop, which would result in a shorter holding period. However, if one is utilising a break-even stop then any actual exit point above this break-even stop would result in some form of profit and thus contribute towards the higher win % anyway, so like the target stop, a tighter trailing stop probably doesn't contribute that much towards it.
As a result, it seems that the key points to increasing the win rate % is:
1. The realibility of the entry signal.
2. Adopting a break-even stop.
If this is the case, then surely a high win rate can be achieved with longer-term systems by focusing on these 2 points?? Point 2 would be easy to adopt so the reliance on achieving a higher win % is with the reliability of the entry. Howvever, as most longer-term systems have a lower win rate%, is the reason for this that finding a reliable entry signal is more difficult?
I ask as in my own situation, regardless of what approach I adopt for my entry and exit rules, my win rate % never seems to exceed 50% and in most cases falls within the generalised 40-50% range.
I'm sure I've missed some very obvious points and welcome any comments / discusion on this.....
Thanks in advance,
PS. I fully understand that the "expectancy" of a system is what really matters in terms of making a profit or not but making a profit in not really the point of this particular discussion.