Updated: Aug 30, 2021
Most people don't believe me when I say it is impossible to make money even after using a 90% accuracy intraday trading system.
Because there is no such thing as a 90% accuracy trading system without compromising on other factors, for example, 'Buy Banknifty at 35000, Target 35200, and Stop-loss at 30000' kind of calls can easily generate over 90% accuracy. However, they fail to make money in actual trading.
In this case, how much money you make when you win compared to how much money you lose when the price hits your stop-loss (risk-reward or profit factor) is not considered.
Hence, all the below parameters of a trading system are equally important to taste success in stock market trading, whether intraday trading or swing trading.
1 - Accuracy
If you see any statement with 90% accuracy, then either that person is using it as a click-bite headline, or he is fake.
Because in the uncertain world of the stock market, it is impossible to come up with 90% accuracy without compromising other factors.
Fact - A good trading system will have only 40-60% accuracy without compromising other factors.
2 - Profit Factor (PF)
It is similar to risk-reward. It is derived using the below formula:
Profit Factor = Total Profit by Winning Trades / Total loss by Losing Trades
In most cases, PF is inversely proportional to Accuracy. Whenever we look for a high-accuracy trading system, PF automatically decreases. In contrast, many trading systems with less accuracy will have high PF (it doesn't mean all those systems with less accuracy will have high PF).
Fact - A trading system above the 1.2 Profit Factor is good if it scores well with other factors.
3 - Maximum Drawdown
Assume a trader has a good trading system – Accuracy of 60%, Profit Factor of 1.5.
It means out of 100 trades, 60 trades are winners, and 40 trades are losers. In addition, if we risk 10K per trade, winning trades made a profit of 15K (RR or 1-1.5).
So all looks good on paper.
Let's say a trader starts to use the above system and deploys 1,000,000 (10 Lakh) capital for this system.
After a few trades, his portfolio reduces to 700,000 (7 lakh, which is 30% erosion). Do you think he will retain the same emotional stability to take trades using the same trading system?
The answer is a big NO!
In the above case, if the maximum drawdown is only 10% (means capital erosion only up to 9 lakh), then the same trader will be in a better frame of mind to take the trades using the same trading system.
Hence, maximum drawdown also plays a vital role psychologically while picking a trading system.
Fact - Maximum Drawdown in any trading system should not exceed 20%. I suggest picking only the techniques which have less than 10-15% maximum drawdown.
4 - Maximum Consecutive Losers
We all have a history of succeeding, failing, and even quitting in life. But how do we face all these failures in life define us to move on to being a stronger person.
Whenever we face a failure (how small it may be) in life, we feel bad. It is because of our typical upbringing, and the same logic applies to trading as well.
We all feel bad even if we lose only Rs.1,000 in a trade. Because it is not only about the money, it is emotionally difficult to accept the failure.
Hence, if a trading system has more consecutive losing trades, we may not take trades when we face more failures due to psychological breakdown.
Fact - A good trading system will have less than 12 consecutive losing trades. It might look like a significant number on paper, but don't forget, statistically, there is a possibility of 10 successive losers even for 50% accuracy systems.
A Simple Intraday Trading Example
I will show the results of one of my intraday trading systems to understand these concepts in a better way.
I have developed this system using a simple stochastics indicator and backtested against 10 years of historical data of Banknifty from Jan-2010 to June-2021.
Success Ratio – 43.4%
Profit Factor - 1.35
Maximum Drawdown - 12%
Maximum Consecutive Losing Trades - 9
Now observe these parameters of this intraday trading system.
A trading system should work in all market conditions. It has been backtested against 10 years of historical data (Banknifty), and 10 years will consist of all types of market conditions (uptrend, downtrend, sideways, narrow range, and volatile markets).