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Largest Single Winning Trade

аPerhaps more important than the largest single losing trade is the largest single winning trade. If, for example, your hypothetical profits total $96,780, and $33,810 of this is attributed to only one trade, you have a distorted average trade figure. It's often a good idea to remove this one trade from the overall results and recompute them in order to show the performance without this extraordinary winner. You may find that the system you have tested is mediocre, perhaps even a loser, when the single largest trade has been eliminated from the performance summary. If you can wait 10 years for the one big trade, then use the system - but do so against my advice. What you're looking for in any system with regard to average winning and losing trades is consistency - far more important than one or two extremely large winning trades that give a distorted performance picture.

On occasion only several trades may account for a considerable portion of the net system profits. While some traders feel that this somehow diminishes the value of the system, I disagree. As long as at least one-half of the overall system performance is due to trades other than the largest single winning long and short trade combined, the system is valid. As far as numbers are concerned, I would not use any system that, after deducting reasonable slippage and commission as well as the largest single long and short winners, does not show at least $100 average profit per trade.

More importantly, because a large portion of profits in many systems derives from a very small number of trades, it is imperative that you follow each and every trade as closely to the rules as possible. Trading systems are not money machines; they don't grind out one profit after another. Trading systems make their money on the bottom line. There are many losers and few winners. The losers are kept in check by using money management stop losses that must, in most cases, be reasonably large.

And the winners, only a few of which are very large, make the game worth the candle. The trader who can't stick with a position, or let it ride, is the trader who will be sorely disappointed with the results, because the big winners will be cut short.

Later in this book I will make a case for systematic market entry and less rigid market exit. Bear in mind, however, that when this procedure is followed, you must stick with the original system as closely as possible for market entry. Such adaptations are recommended for the skilled trader only!

Percentage Winning Trades. This statistic is not nearly as important as one might think. In actuality, few systems have more than 65 percent winning trades, and the more trades in your sample, the smaller this figure will be. Systems that are correct as little as 30 percent of the time can still be good systems, and systems that are accurate as much as 80 percent of the time can be bad systems. It's easy to see that even a high degree of accuracy with a large average losing trade and small average winning trade does not make a good system.