Percent Profitable is not an evaluation metric … it’s a perspective tool.
In the real world, Percent Profitable provides no worth when reviewing the performance of a system. Think about it, a friend, colleague, newsletter writer or system vendor tells you they are 90% accurate in their trade selections. You think WOW, they must really know what they are doing and by logic must be a great trader. For every ten trades they take, nine will be winners and only one will produce a loss. On the surface that sounds wonderful. 90% accurate how could they lose?
The problem is … Percent Profitable provides no context around real net profit. Its only real purpose is to make you feel warm and fuzzy.
Example: A trader makes $500 on each of nine winning trades, but losses $15,000 on one losing trade. It’s obvious where I’m going here, but let’s still run the numbers.
9 Winning trades @ $500 = $4,500
1 Losing trade @ $15,000 = -$15,000
Net Loss = -$10,500
You’re 90% accurate, but end up with a major loss in your account.
Bottom line: A high percent profitable number by itself means absolutely nothing. Having co-created the back tester report for TradeStation, I know there are far better metrics to look at when measuring true performance. Percent profitable is not one of them.
I’ll address a variety of evaluation metrics on this blog and in our webinars in the coming months.
FYI: In the simple example above, trend traders are approximately 35-40% accurate in their trades. Why? They take a lot of small protective losses while waiting patiently for big trends. Accuracy and profitability don’t always go hand-in-hand.
