Profitable Trading Strategies (Video, Backtest, Rules, Performance, Example Analysis)

To succeed in trading depends on having a profitable trading strategy and implementing it well. Of course, this seems like a no-brainer, but what exactly does a profitable trading strategy mean?

A profitable trading strategy is one that consistently makes money over a reasonable period of time. It is not just enough for a strategy to make some winning trades over a short time because market conditions can change and it stops making money; the strategy must have a combination of a reasonable winning rate and a sizeable gain per win such that after summing the wins and losses, it is in net profit and must do so consistently over a reasonable period that spans across different market conditions.

In this post, we look at what it means for a trading strategy to be profitable. We end the article by making a backtest of a profitable trading strategy.

Table of contents:

What does a profitable trading strategy mean?

A profitable trading strategy is one that consistently makes money over a reasonable period of time. It is not enough for a strategy to make some winning trades over a short time because market conditions can change and it stops making money; the strategy must be able to make money across different market conditions.

One thing to note is that having a high winning rate does not necessarily translate into a profitable strategy. A strategy can have a high win rate and not be profitable because the few losing trades are huge enough to wipe out all the profits made from the numerous winning trades. A profitable strategy must have a combination of a reasonable winning rate and a sizeable gain per win such that after summing the wins and losses, it is in net profit. And it must do that consistently for a reasonable period of time.

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Features of the most profitable trading strategy

There are many features a profitable strategy must have. These are some of them:

Reasonable win rate: While the win rate is not everything for a strategy, to make money, a strategy must win some trades. No strategy makes money losing all its trades. Every other thing being equal, the more the number of wins, the more the profit. Depending on the reward/risk ratio, the number of winners may not necessarily need to be more than the number of losers.
Reasonable average gain per trade: The average gain per trade is gotten by dividing the total amount won by the number of trades. The higher the value, the better. A high value indicates that the strategy has a good win rate and reward/risk ratio combination.
Optimal reward/risk ratio: The reward/risk ratio is the ratio of what is gained per winning trade to what is lost per losing trade. As a trader, you may plan for this with a profit target (and perhaps a stop loss). A 3/1 reward/risk ratio means that the profit target is 3x the size of the stop loss. While a 3/1 reward/risk ratio or higher is desirable, the profit target may be too high for the price to get to, leading to some would-be winners turning to losers, breakeven, or lesser profit (when stopped out by a trailing stop). Find out the optimal rat