## Percentage of profitable trades

The percent profitable trades number expresses the number of winning trades out of the number of the total trades. It is important not by itself (a trend following system can have a low percent profitable trades number such as 35% and still be a viable system) but because it can be used to gauge how the system is balanced in relation to the average winning trade/average losing trade ratio. Usually the logic is that if you win a lot of times the average winning trade/average losing trade ratio will be low, while if conversely your percentage of profitable trades is low then the ratio will be high (inverse relationship). A 50% percent profitable trades number is a healthy one. If it grows significantly over 50% (for example to 60% or 70%) be watchful because something could be wrong: to counterbalance such a high percentage the average winning trade/average losing trade ratio should be particularly low, often even under the alarm level of 1. If you are using target exit (let's assume you exit 50% of the position at a price limit over the entry) it is normal for the percentage of profitable trades to go over 60% and the average winning trade/average losing trade to go under 2.

The percentage of profitable trades number is also important for calculating the mathematical expectancy of a trading system. The percentage of profitable trades multiplied by the average winning trade should be higher than the percentage of losing trades multiplied by the average losing trade. Mathematical expectancy, in other words, should be positive and the higher the better. You can use this measure of mathematical expectancy to rank systems and pick up the best.

As far as the percentage of profitable trades is concerned there is a caveat that must be regarded with careful attention: a 50% profitable trades ratio does not mean that a loss is followed by a win or vice versa. It is a controversial area if a trade sequence suggests it is possible to claim that a win follows a win or vice versa in some order. Even if the topic is fascinating, a prudent trade should always fight against the worst and hope for the best so that in our experience to trust on trade dependency is particularly risky since the assumption is quite strong. Indeed you are assuming that there is a recurring order in the trade sequence; that is, probabilities in the past show that after three wins in a row it was more likely to have two losses instead of a fourth win.

There are roulette players which really believe that the chance of getting a red number in the next run increases if you just had a black one. And even worse, they believe that the chance of getting a red number becomes bigger and bigger if a row of subsequent black numbers occurs, for example 7 or 10 times in a row. From logical thinking and statistical theory, however, you know that each run of the roulette in the casino is completely independent from another. So it has no meaning, neither good nor bad, if in the run just before there was a red number, a black one or the green one. Each occurrence of a number is completely independent from the other ones. So betting on a colour in the next run your chance is always the same: 18/37 = 48.6% (since there are 18 black and 18 red numbers plus one green 0).

Although the financial markets, especially for beginners, sometimes look like a casino, they are very different and more complex. In many cases they behave accidentally, with many movements happening up and down and nobody knows why. There are however some special situations which are created by human psychology of greed and fear when the market behaves differently to accident. It is these movements where, in special trading systems in special situations, trade dependencies can occur [5]. But this is a sophisticated topic that goes beyond of the scope of this book. In any case we recommend readers approach this topic with extreme prudence.

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