Batting .400 – Works for Baseball and Trading

Our intern from last summer, Sean Knudson, pointed our recently that I was very close to writing my 400th blog. He suggested I do something fairly special. This is my 400th blog.

As a life-long baseball fan when I hear the number 400 I think of my childhood hero George Brett who came real close to finishing the 1980 season with a .400 average. He would have been the first to accomplish this feat since Ted William did so in 1941. As a reference, Miguel Cabrera led the American League in batting average last year, hitting .330, while Buster Posey led the National League with a .336 average.

Batting .400 in baseball is unheard of, or at least has been for 71 seasons. For those that are not baseball savvy batting .400 basically means a hitter successfully hits their way on base 40% of the time they come up to bat. That means they ‘win’ only 40% of the time. Winning 40% of the time does not sound like success, but it is in hitting, and it can be in trading.

Let’s say you have a trading methodology that has 40% winners and 60% losers. It sounds bad on the surface, but may actually be a very profitable method of trading. It all comes down to risk control. Let’s say every losing trade gives up $50 and every winning trade has an average profit of $100. If you have five trades and 40% are winners with 60% being losers the result would be 2 winners and 3 losers. The net result, if the wins average $100 each and the losers are $50 each would be a net profit of $50. The math shows up below –

$100 + $100 – $50 – $50 – $50 = $50

Trading is just as much about risk control as it is about profitable trades. Limiting the net loss amount versus the average win would result in a system that yields profitable results over time. In 1980, George Brett had a September slump (hitting “only” .304 in his last 13 games, hobbled by torn ligaments in his ankle) and ended up batting .390 for the season, or successfully hitting 39% of the time. That is very impressive in baseball and 39% could work for trading as well.

Russell Rhoads