How to Increase Average Winner Without Changing Your Setup
Increasing average winner (AW) enhances expectancy. This lesson details methods to increase AW without altering entry or exit criteria. Focus remains on position sizing and scaling techniques.
Understanding Average Winner
Average winner is the mean profit of all winning trades. $AW = \frac{\sum \text{Profit of Winning Trades}}{\text{Number of Winning Trades}}$
A higher AW directly improves expectancy. $Expectancy = (\text{Win Rate} \times \text{AW}) - (\text{Loss Rate} \times \text{AL})$ Where AL is Average Loser.
This lesson assumes a fixed setup, meaning entry conditions, stop loss placement, and initial profit target logic remain constant. The goal is to extract more profit from winning trades.
Dynamic Position Sizing
Fixed position sizing limits AW. Dynamic sizing adjusts share count based on trade characteristics.
Volatility-Adjusted Sizing
Adjust position size based on instrument volatility. Lower volatility allows larger positions for the same dollar risk. Higher volatility requires smaller positions. This maintains a consistent dollar risk per trade.
Example: Trader risks $100 per trade. Setup stop loss is 0.20 points from entry. Initial position size: $100 / 0.20 = 500$ shares.
Consider two scenarios:
- Stock A: ATR (14) = $0.50. Stop loss is 0.20 points.
- Stock B: ATR (14) = $1.50. Stop loss is 0.20 points.
If a fixed 500 shares are traded: Stock A: 500 shares * $0.20 risk = $100 risk. Stock B: 500 shares * $0.20 risk = $100 risk.
This approach maintains consistent dollar risk. To increase AW, we need to consider how volatility affects potential profit. A more volatile stock might move further in your favor.
Instead of fixed dollar risk, consider fixed percentage of capital risk, then adjust position size based on volatility to capture larger moves.
Assume a trader risks 1% of a $50,000 account, or $500 per trade. Setup stop loss is 0.20 points. Initial position size: $500 / 0.20 = 2,500$ shares.
If Stock B (higher volatility) often moves 3x its stop loss distance, while Stock A (lower volatility) moves 1.5x its stop loss distance, trading a fixed share count means you capture less in dollar terms from Stock B relative to its potential.
To increase AW without changing the setup, consider scaling into or scaling out of positions based on price action and volatility.
Scaling Out: Profit Taking Strategy
Scaling out involves taking partial profits at predetermined levels. This extends the average holding time of a winning position, allowing more profit accumulation.
Fixed Percentage Scale Out
Set multiple profit targets. Close a percentage of the position at each target.
Example: Trader buys 1,000 shares of XYZ at $50.00. Stop loss at $49.70 (0.30 risk). Initial profit target (PT1) at $50.60 (0.60 profit). Subsequent targets based on multiples of initial risk or ATR.
Strategy:
- Close 50% of position (500 shares) at PT1 ($50.60).
- Move stop loss for remaining 500 shares to breakeven ($50.00).
- Hold remaining 500 shares for further price appreciation.
Scenario 1: Price reaches PT1, then reverses to breakeven. Profit from 500 shares: $50.60 - $50.00 = $0.60 per share. Total = $300. No profit/loss on remaining 500 shares. Total profit = $300.
If the trader took full profit at PT1: Profit from 1,000 shares: $50.60 - $50.00 = $0.60 per share. Total = $600.
This example shows a decrease in AW if the trade only hits the first target. The strategy aims to capture larger moves when they occur.
Scenario 2: Price reaches PT1 ($50.60), then continues to PT2 ($51.20). PT2 is 2x initial risk ($0.60 * 2 = $1.20 profit from entry).*
- Close 50% (500 shares) at PT1 ($50.60). Profit = $300.
- Close remaining 50% (500 shares) at PT2 ($51.20). Profit = ($51.20 - $50.00) * 500 = $1.20 * 500 = $600. Total profit = $300 + $600 = $900.
If the trader took full profit at PT1: $600. If the trader took full profit at PT2: ($51.20 - $50.00) * 1000 = $1,200.*
The scaling out strategy, in this case, yielded $900. While less than holding for PT2 with the full position, it offers risk management (locking in profit) and allows for extended gains without risking the entire position. The average winner across many trades will increase if a significant portion of trades extend past PT1.
To calculate the impact on AW: Assume 100 trades. Win Rate = 60%. Loss Rate = 40%. Fixed target strategy: All 60 wins hit PT1 ($0.60 profit). AW = $0.60 * 1000 shares = $600. Scaling strategy:*
- 30 wins hit PT1 and reverse (Scenario 1): $300 profit each. Total = $9,000.
- 30 wins hit PT2 (Scenario 2): $900 profit each. Total = $27,000. Total profit from 60 wins = $36,000. New AW = $36,000 / 60 = $600.
This example shows no change in AW. This is because the distribution of wins was 50/50 between PT1 reversal and PT2 hit.
To increase AW, the scaling strategy must capture more profit on average than the fixed target strategy. This implies that a significant portion of trades must extend beyond the initial fixed target.
Let's adjust the scaling strategy. Trader buys 1,000 shares of XYZ at $50.00. Stop loss at $49.70 (0.30 risk). PT1 at $50.60 (0.60 profit). PT2 at $51.20 (1.20 profit).
Strategy:
- Close 30% (300 shares) at PT1 ($50.60).
- Close 30% (300 shares) at PT2 ($51.20).
- Hold remaining 40% (400 shares) for further appreciation, trailing stop.
Assume the trailing stop for the last 400 shares is $0.50 below the highest price achieved after PT2.
Scenario 3: 60 wins.
- 20 wins hit PT1, then reverse to breakeven for remaining 700 shares. Profit: 300 shares * $0.60 = $180.
- 20 wins hit PT2, then reverse to breakeven for remaining 400 shares. Profit: (300 shares * $0.60) + (300 shares * $1.20) = $180 + $360 = $540.
- 20 wins hit PT2 and continue, with the last 400 shares exiting at $51.80 (1.80 profit). Profit: (300 shares * $0.60) + (300 shares * $1.20) + (400 shares * $1.80) = $180 + $360 + $720 = $1,260.
Total profit from 60 wins: (20 * $180) + (20 * $540) + (20 * $1,260) $3,600 + $10,800 + $25,200 = $39,600.*
New AW = $39,600 / 60 = $660.
Compared to the fixed target AW of $600,
