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Authors Fang

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Fang
Fang
@FangTrades
The more right you are about your trade setup, the less likely you are to get filled

By extension, getting filled actually lowers the Bayesian probability that you are right

Should I sacrifice some RRR to get filled more often?
The eternal dilemma of contrarian trading


I haven't seen this tradeoff articulated on CT. Allow me to explore this, starting with an example of trading with limit orders:

Suppose that for a given setup, price hits target before it reaches invalidation 70% of the time. Great, right? But getting filled is not guaranteed.

Scenario 1: If 100 out of 100 limits get filled, expected hit rate is 70%
Scenario 2: If only 40 out of 100 limits get filled, expected hit rate is 25%

Both scenarios have 30 losses in expectation, but the hit rate in the first is >2x better simply because more trades were taken

Then we have RRR. Setting entries closer to invalidation increases RRR but decreases the probability of getting filled, since entries are further away from the current price. And as above, getting filled less often results in a lower hit rate. So RRR trades off against hit rate.

Where to place the limit orders though? The optimal place to enter maximizes the EV of the setup, where

EV = hitrate * avg_win_R + (1-hitrate) * avg_loss_R

So we want argmax(EV), and we can compute this by seeing how hitrate and avg_win_R affect the EV of the setup.
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