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Stationary Win Rate Examples

Visual chartists, also known as noise traders, in the process of defending a method with low win rate claim that high win rate strategies do not exist. When presented with evidence to the contrary they argue that high win rate is non-stationary. In the article we present examples that refute this claim.

In our article Rule No. 1 And The Importance of High Win Rate we presented three examples of trading strategies with high win rate, two short-term and one longer-term. One of the strategies has been in the public domain since at least 2003.

The main response in Twitter by some revolved around non-stationarity of win rate. This is a valid argument because if win rate is non-stationary, then any associated strategy may not robust. However, low win rate can also vary widely and actually this is more of a problem with related trading strategies, such a visual charting and naive trend-following. For example, although a chart pattern trader expects 2 winners in 4 trades on the average, a long streak of consecutive losers can occur and win rate can drop to 25% or even lower. In this case, risk of ruin probability increases substantially.

Below is a chart of how the win rate of the popular RIS2 strategy (first published by Cesar Alvarez and Larry Connors) has evolved over time in SPY ETF daily data since inception.

After a period of fluctuations but apparently at higher levels, since 2003 RSI2 win rate stabilized around 75% and never fell below 72%. This is true for a strategy that has been in the public domain for more than 15 years and has several variants that are widely traded.

Below is a chart of the win rate of our proprietary PSI5 strategy in SPY ETF daily data since inception.  Note that this strategy is based on a formula from a graduate text in probability theory and it is not data mined.

The win rate of the PSI5 strategy also fluctuated at higher levels above 80% in the 1990s and made a low at about 65% in 2003. Since, it has stabilized close to 70%.

Therefore, as it was demonstrated above with two specific examples, high win rate can be fairly stationary for extended periods of time. The argument made by low win rate promoters against stationarity is in many cases motivated by ignorance. Note that no condition is permanent is the markets due to changing dynamics. However, non-stationarity should be a more serious problem for low win rate strategy promoters because the impact on profitability can be more adverse.

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Charting and backtesting program: Amibroker


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