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Two primary types of trading strategies

When it comes to performance, there are two primary types of trading
strategies—one that has a high percentage of profitable trades and one that
has a high profit factor.

In strategies that have a high percentage of profitable trades, usually
the amount of pips made in winning trades is approximately the same as
the amount of pips lost in losing trades. An example would be a strategy
where 8 out 10 trades are winners, with each winning trade making 20 pips
and each unprofitable trade losing 20 pips. Although this does not satisfy
the t extbook description of a good risk-to-reward r atio, if the number of
profitable trades is far higher than the number of losing trades, the strategy
is still a solid one. In the previous example, the net profit for t he 10 trades
would still be 120 pips. Therefore, if you have a strategy similar to this and
it starts to have six or seven consecutive losers, you know that it is time to
seriously r eexamine the strategy.
For strategies that have a high profit factor but a low percentage of
profitable trades, having a string of losers may be a part of t he trading
strategy. This applies particularly to breakout traders who may take small
positions with tight stops in anticipation of a big breakout. Although they
may get stopped out often f or 30 or 40 pips, when the breakout occurs, the
eventual move could be t o t he degree of 400 or 500 pips.
The key here is t o know exactly what type of market environment your
strategy performs well in and what type of market environment your strat-egy fails in, because only t hen will you know when it is time to pull the plug.
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