Bread and Butter has both of the predictors for collapse or serious problems: a win % over 79% and a ratio of Av $ Gain to Av $ Loss of under 1.2. Indeed, it has values way beyond the threshold for concern: a 92.6% win rate and a Gain/Loss ratio of .19.
I analyzed these risk factors for strategies during the Feb. 2018 10% stock market drop. The troublesome strategies fell 20%-100+% in late Jan. or early Feb. Indeed, 4 of the top 5 rated C2 strategies experienced such troublesome issues.
Most of the troublesome strategies (60%) have win rates above 79%, while only 12% of the recently adequate strategies [those performing better than a 10% drop] have win rates above that level.
Among the 41 top rated strategies on C2 on Feb. 5, those with a win rate above 79% had a 75% chance of failure or serious trouble in the last week, while those with a win rate of 79% or less had only a 21% chance of serious trouble.
Further, half of the troubled group had ratios of av. Gains to av. Losses of less than 1.2, and 36% (5 of 14) had ratios of less than .76. This compares with only 15% of the adequate group having ratios of less than 1.2 and only 1 of the 26 strategies in the adequate group having a Av Gain / Av Loss ratio below .76.
Putting this together for all 41 strategies, for the 7 strategies having both risk factors (win rate over 79% and ratio of less than 1.20), 5 of them (71%) either failed or had serious recent problems. For the 9 strategies with only one risk factor, 6 of them (67%) either failed or had serious recent problems. For the 25 top-ranked strategies that had neither risk factor, only 16% had serious problems in recent days.
RISK FACTORS: (1) High Win Rate & (2) Low Ratio of Av. Gain to Av. Loss
- 2 Risk Factors: 71% Trouble Rate
- 1 Risk Factor: 67% Trouble Rate
- Neither Risk Factor: 16% Trouble Rate
CONCLUSIONS:
This small study tested two of the common hypotheses offered on this discussion list for system failure or serious trouble: high Win % and low Av. Gain v. Av. Loss. It examined the 41 strategies with the highest C2 scores on Feb. 5 and defined system trouble as ranging from a drawdown of at least 20% in recent days to complete failure (down over 100%).
Both hypotheses were supported by the data.
Further, Bread and Butter shows extreme values for both worrisome predictors: a 92.6% win rate and a Gain/Loss ratio of .19. Among the top 41 strategies examined in Feb, all but one of the 6 strategies with Gain/Loss ratios below .80 failed or dropped 20-90% in early Feb. And all but one of the 5 strategies with a Win % above 87% failed or dropped 20-90% in early Feb.
Past performance is no guarantee of future performance, but the odds are against Bread and Butter.
