This post talks about the second part of the trade selection tool, applicable to shorter term variables on the 2H chart. One of the most important and critical variables is the strength of the setup for a particular commodity as determined by the WIN RATIO. It differs by commodity and has been arrived at after rigorous backtesting over the past two years.
Why is the Win Ratio so important? Lets understand this with the help of one example -
Bullish Engulfing at Support - Setup 1 of the 7 bullish setups. This setup has a Win Ratio and "Profit / Lot" (based on backtesting for a period of 2 years) as below:
Commodity | Win Ratio | Profit/Lot (INR) | Strength of Setup |
Crude Mini | 93 % | 700 | Very Good - Highly Tradable |
Natural Gas Mini | 65 % | 380 | Average - Discretionary |
Copper | 79 % | 4700 | Good - Tradable |
Zinc Mini | 79 % | 1250 | Very Good - Highly Tradable |
Aluminium Mini | 64 % | 70 | Bad - Not Tradable |
Crude has the highest Win Ratio > 90%, which means that out of 10 trades, 9 trades on this setup have been successful in the past 2 years. Copper and Zinc are > 70% which makes it a strong setup. However, for Natural Gas and Aluminium, the setup has a win ratio < 70% which is average. Also, "Profit / Lot" is High for Crude and Zinc, Average for Natural Gas and Copper and Bad for Aluminium.
Note : The categorization of "Profit / Lot" for a setup for a commodity is on a comparative basis with the other setups within the same commodity.
The Strength of the Setup is determined on the basis of the combination of Win Ratio and Profit / Lot. Self explanatory in the above example.
So where do you get the results of backtesting - the Win Ratio and the Profit / Lot ? We would provide that to you in the final post of this section where we share examples of how to use the Trading Selection tool.
Please click on "Next Post" to discover the next short term variable of trade selection, the Chart Pattern on the 2H charts - Trade Selection - Chart Pattern.
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