Let's say you have a strategy which is positive and just for the sake of discussion this strategy has (and I'm making these up so they may not be 100% correct but you'll get the idea):
Option 1
Win Rate: 60%
Reward/Risk: 1.25
Profit: $25k
Trades: 300
Avg Trade = $83
Now let's say you see a way to optimize this strategy. You add in an extra condition and you get:
Option 2
Win Rate: 70%
Reward/Risk: 1.5
Profit: $12k
Trades: 100
Avg Trade: $120
So we can clearly see two things:
1 - Option 2 performs better in terms of risk and equity curve
2 - Option 1 will make you more money
So here's the paradox:
If you take the second strategy, you could trade a bigger size. Let's say you double your size. Now you have:
Option 3:
Win Rate: 70%
Reward/Risk: 1.5
Profit: $24k
Trades: 100
Avg Trade: $240
Now here's the delima: Option 3 is safer than Option 1 and earns the same amount of money, but if you look at return on a percentage basis, it performs less because you have to use twice your money. Now if your money is sitting idle it seems that this is the way to go. But if you could allocate your capital to other trades, then it seems that maybe Option 1 would be better.
However, Option 3 has less trades than Option 1.. which means that you are in cash more often, and that cash is available for other trades. For example if Option 1 has 1 trade every 1 day, and Option 3 has 1 trade every 3 days, you would have (assuming it's a day trade) your money free for 2 of the 3 days and available for other strategies.
So which option would you trade?
Option 1
Win Rate: 60%
Reward/Risk: 1.25
Profit: $25k
Trades: 300
Avg Trade = $83
Now let's say you see a way to optimize this strategy. You add in an extra condition and you get:
Option 2
Win Rate: 70%
Reward/Risk: 1.5
Profit: $12k
Trades: 100
Avg Trade: $120
So we can clearly see two things:
1 - Option 2 performs better in terms of risk and equity curve
2 - Option 1 will make you more money
So here's the paradox:
If you take the second strategy, you could trade a bigger size. Let's say you double your size. Now you have:
Option 3:
Win Rate: 70%
Reward/Risk: 1.5
Profit: $24k
Trades: 100
Avg Trade: $240
Now here's the delima: Option 3 is safer than Option 1 and earns the same amount of money, but if you look at return on a percentage basis, it performs less because you have to use twice your money. Now if your money is sitting idle it seems that this is the way to go. But if you could allocate your capital to other trades, then it seems that maybe Option 1 would be better.
However, Option 3 has less trades than Option 1.. which means that you are in cash more often, and that cash is available for other trades. For example if Option 1 has 1 trade every 1 day, and Option 3 has 1 trade every 3 days, you would have (assuming it's a day trade) your money free for 2 of the 3 days and available for other strategies.
So which option would you trade?
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