Quality vs Quantity – Which is Better for Trading?

There seems to be a ton of confusion on both sides regarding the Quality vs Quantity Argument when it comes to trading.  Being such an important subject for a trader, I have been wanting to write about this for some time so it’s time to put some of the myths, mis-information and confusion to bed here.

quality vs quantity in trading 2ndskiesforex.com

One of the big arguments going around has to do with ‘Quality vs Quantity‘, and it is often masked in the typical;

-Trading Higher Time Frames = More Accuracy

-Trading Smaller Time Frames Carry More Risk

-Anything Below The 1HR Charts is Just Noise

-Quality Trades Make More Money Than Quantity

In regards to the above statements, only one of them is true, but it is incomplete by itself and does not paint the whole picture.

Today’s article is here to dive into this subject, explore both sides of it, and talk about which of the two competing theories is correct.

Quality Is Better Than Quantity When It Comes To Trading
I know two groups of billion dollar business entities that would completely disagree with this argument. They would be Casino’s and HFT shops (High Frequency Trading).

Casinos often times (in the various games you can play there), only have a slight edge, often times 1-4%, meaning they are 51-56% likely to win at every play, with a 49-44% chance to lose.  This small edge might not seem like a lot, but played out over 1000’s of times a day, and it all adds up.

high frequency trading algos quantity vs quality 2ndskiesforex.com
HFT algos also take a similar approach.  They are not trying to make huge winners and let trades run for days. They are in anywhere from hours to minutes, perhaps seconds, or even nan0-seconds.  They make small trades for ultra small profit, but they do this hundreds of times a day, and make money year in year out.

These two things alone debunk the whole quality is better than quantity argument, as they are highly successful at what they do.  In 2011 alone, HFT firms made over $1.2B (yes, billion) in profits.  Not bad for having such an inferior trading style!

HFT methods simply use the mathematics and repetition of the edge to make profit.  It’s an edge – maybe not the easiest for a human trader, but an edge nonetheless, and it makes money.

The bottom line is, if you have an edge, the more times you can apply it with the same level of accuracy, the more the edge will play out in your favor.  And that leads to more profits.

quality vs quantity a comparison approach 2ndskiesforex.com

A Comparison Approach
To really see the numbers and a comparison approach, let’s take System A with 60% accuracy, trading 5x a month, risking 100 pips and targeting 200 pips.  Below is how the math works out;

5 trades over 12 months = 60 trades per year
60 trades x 60% accuracy = 36 winners and 24 losers
36 winners at 200 pips gained =  7200 pips gained
24 losers at 100 pips lost = 2400 pips lost
Total Profit =  +4800 pips

Now, lets take System B, which is the same as System A, but bring down the accuracy just 5%, assuming you will be less accurate trading the same system on a lower time frame.  Let’s have you trading 20x a month (~5x per week), risking 50 pips and targeting 100 pips (same ratio of risk to reward).  Here is how the math plays out below;

20 trades a month = 240 trades per year
240 trades at 55% accuracy =  132 winners and 108 losers
132 winners at 100 pips gained per trade =  13200 pips gained
108 losers at 50 pips lost per trade = 5400 pips lost
Total Profit = +7800 pips

Assuming you risked the same equity % per trade using System B – trading quantity over quality made more pips and profit.  Even if I make System A 15 % more accurate than System B, here is how the math plays out;

60 trades at 70% accuracy = 42 winners and 18 losers
42 winners at 200 pips gained per trade = 8400 pips gained
18 losers at 100 pips lost per trade = 1800 pips lost
Total Profit = +6600 pips

As you can see, even being 15% more accurate, System A still under-performs System B.  Only until you get to 77% accuracy will System A outperform System B.

So this whole argument that Quality over Quantity is mathematically false.

One of the key questions you should be asking yourself then is;

Can I be 77% accurate trading my system on the higher time frames?

If not, you may want to reconsider how to maximize your edge, which is all you are really doing in trading. But the fact is that trading on higher time frames will take longer to make money as you will have less signals in the market.

quality vs quantity key points 2ndskiesforex.com
Key Points
A few of the typical or vanilla counter-arguments to the quantity makes more than quality statements are;

1) Trading higher time frames is less stressful and is More Accurate

2) Anything below 1hr charts is just noise

3) Trading lower time frames causes you to over-trade and over-analyze

Of the above statements, only one is true to some degree (#1) , but again it is incomplete by itself and needs to be fully understood.  Let me break down each one so you can fully understand the differences.

Trading Higher Time Frames is Less Stressful and More Accurate:
Of all the statements, this is really the only one with some truth, and it has to do with the second part (being more accurate).

I have quantitatively tested various 1, 2 and 3 bar price action signals (over 24 in total), such as pin bars, inside bars, engulfing bars, 2-bar reversals, outside bars, and more across every time frame from the 1m to weekly.  Statistically, if you are just trading these patterns by themselves, they tend to be more accurate on time frames such as daily and 4hr strategies (along with the 1hr), then they do on say the 5m.

The reason for this is, a daily candle includes 24hrs of price action, therefore 24hrs of market sentiment and order flow, which is three sessions total.  This can have a lot of info as to how players are positioning themselves both intraday and daily.

Thus, with a greater amount of market sentiment over a longer period of time, you can trade some of these patterns with greater accuracy.

However, as we have seen above, greater accuracy does not always = more profits.  One thing should be noted though accuracy is not the same trading the often promoted NY Daily Close.

I have one system that on the NY Daily Close, on one pair, trades highly accurate, but another pair quite poorly.  If you have an idea as to why, write in a comment below, but the statistics and profitability are night and day, so NY Daily Close is not ideal for all systems, pairs and time frames, and in many cases, under-performs massively.

Thus to sum it up, trading the higher time frame ‘can’ lead to more accuracy.

However, the notion of trading the higher time frame is less stressful is not true, and really a matter of having a successful trading mindset.  Some people are more naturally wired to have a set and forget style of trading.  Others are better at managing small details, so trading a higher time frame would actually work against their natural mindset.

lower time frames is more stressful 2ndskiesforex.com

There is no one-size fits all, thus the key is to find what is most natural to you.

I would like to state generally, if I was starting with a new student, I would start them on a higher time frame as accuracy in the beginning is critical to the learning process.  This is exactly how it is in my archery training – in the beginning you start with a target close by, say 3-6 meters, and only after time do you move to targets farther away.

But the idea of lower time frames being more stressful is a matter of mindset, training and practice. Stress is based on how one perceives information and reacts to stimuli.  To some people, being bored is more stressful, and there are tons of studies that boredom can hugely interfere with the trading and learning process.  For an F1 driver, being stuck in traffic may feel like torture, but doing 150MPH may be joyful. Food for thought.

Anything below 1hr charts is just noise:

First off, this argument often comes from daily chart traders saying price action below the 1hr is just noise. Ironically, this same argument comes from 1hr chart traders who say the 1m time frame is just noise. Who is right, and is it just a matter of perspective?

The truth of the matter is, although there is a greater possibility to witness ‘noise‘ (price action that is the result of non-directional interest and order flow), on lower time frames, support and resistance levels work just the same.  They simply require a little tweaking.  But the bottom line is, order flow creates price action, and price action is simply information.

Using a recent example of a live intraday price action trade I did on Gold, take a look at the two charts below;

Exhibit A (4hr Time Frame Gold/USD)
price action quality vs quantity 2ndskiesforex.com exhibit a gold 4hr chart

Looking at the chart above, we can see three strong reactions to the $1685 level on Gold, all communicating strong buying interest at this level.

Now look at the chart below which is the third rejection on the 5m time frame.

Exhibit B (5m Time Frame Gold/USD)
price action pin bar + inside bar combo quality vs quantity 2ndskiesforex.com exhibit b gold 5m chart

Looking at the chart above, we can see the same strong reaction and buying interest off this level in the first wick.  But we can also see there are two high quality price action signals off this level, with a pin bar false break, along with an inside bar + pin bar combo.

I actually got long on this trade, and made over +1415 pips of profit just using pure price action on the 5m chart.

Does the price action at the bottom of this chart look like ‘noise‘ to you?

I don’t think so, and it shouldn’t.

Learning to filter out useful information and helpful information is just a matter of training and time.  But the idea anything below the 1hr chart is just ‘noise‘ is ridiculous and really a freshman understanding of price action.

Trading Lower Time Frames Causes You To Over-Trade and is Greater Risk:

Although there is some truth to this, it really is misleading.  If you analyze each bar, sure, you will be over-analyzing the charts, but this applies to any time frame.  In a choppy range, you are not watching every bar for clues, especially the bars in the middle of the range.

However, if you are marking your key levels on a higher time frame, and simply looking for signals at those levels, then the chances of you over-analyzing are slim.  It is really a question of trading and preparation- not a fact that you will over-analyze.

mind has neuro-plasticity 2ndskiesforex.com

The mind has neuro-plasticity to it and can learn almost any skill.  You can learn to filter out unimportant bars and price action on the chart – all it takes is a little practice.  Once you do, you wait for your key levels and signals, and get in without any extra analysis or stress.

The whole idea of doing less is better for you (or being lazy), I have already demonstrated, doesn’t make you more profitable.  Try this same logic to exercising, playing piano or hitting a golf ball, and tell me how that works out!

As to trading the lower time frames or intraday trading equaling greater risk, is a confusion.  Risk has nothing to do with the time frame.  Risk has to do with three things;

1) Position Sizing
2) Size of Stop Loss in Relation to Target
3) Accuracy

I can have a 3 pip stop (via position sizing) = more risk than a 500 pip stop.  I can also make more money with a 50 pip target and 20 pip stop (2.5:1 reward-risk ratio) than a 500 pip target and 250 pip stop (2:1 reward to risk ratio), with the same equity % at risk per trade.  So this notion that risk is > on lower time frames is mis-informed.

Does This Mean Quantity Is Better Than Quality?
This is the real question, and it comes down to edge, personality and availability.  If you are not available to trade more throughout the day, and have a full time job with only a few hours to view the charts, then I’d suggest trading the higher time frames.  However, if your personality is more suited to being more active, then trading 4-5x a month could be harmful to your learning process.   So remember trading rule # 1 – know thyself when it comes to trading, and find a system, time frame and style that best suits you.

trading rule #1 know thyself 2ndskiesforex.com

And we always have to consider our edge.  If we trade the daily time frame at 60% accuracy, and the 4hr or 1hr time frames more often with slightly less accurately, do the math and see how it works out.  If it’s more profitable trading more often with slightly less accuracy, then do it, as long as it doesn’t throw off your life or health.

But the bottom line is, the whole argument quality is better than quantity doesn’t always hold up, and you need to do the research and the numbers to determine which has a greater edge.  And without a doubt, it is a fact if you can take your same edge, and apply it more often than you are now, you will make more money and be more profitable.

Thus, in regards to the question as to which is better, the answer is neither one is better, but both!

Quality matters, but can under-perform.  Quantity repeats the process faster of making profit, but has to be considered in the larger scheme and what is most natural for you.  However neither one is better, and the best edge lies somewhere in between the two.

So don’t be fooled by any freshman arguments stating one is better than the other – because they are simply not true, highly inaccurate and misleading.

Hopefully this article will put a lot of the mis-information to rest, and give you a new perspective on this critical subject.  In a follow up article, I will talk about how I approach this subject in my personal trading, and what I think is the ‘Ideal Trader‘ in relationship to these two.

Kind Regards,
Chris Capre

Buddhist, Trader and Philanthropist

I'm Chris Capre, Founder of 2ndSkiesForex. I help traders of all levels change the way they think, trade and perform. As a professional trader, I specialize in trading price action. As a teacher, my passion lies in showing you how to re-wire your brain for successful trading. Want to improve your edge right now? Visit my Price Action Course page.

Related Article

  • DV

    This is absolutely true, Expectunity (Expectancy * Opportunities) is not even covered that well in Van tharps work… but should be!

    Through my own back testing of systems I have found that often times the system will have an expectancy ‘curve’ R:Risk vs Win% which shows a peak theoretical expectancy for a system…

    However if you add the no. of opportunities at each R:R ratio the most profitable zone is often at a lower win% than peak expectancy as it gets triggered more often

    Great article Chris, wish others wrote more about what is truly important in trading…

    Cheers
    Dion

  • Gary

    Graet Article Chris! You Da Man!

    • Hello Gary,

      Glad you liked it.

      Kind Regards,
      Chris

  • Sahil

    Hi Chris,

    Great article. As you mentioned, knowing who you are as a trader i.e intraday, swing etc makes all the diference as there’s no one size fits all type of stratergy.

    It’s what you’re nost comfortable with. If i use soccer as an expample, it’s like Lionel Messi playing goalie. Sure he may have some success with it but his true strenght lies in attack and scoring goals.

    The same would go for trading. Know who we are and what works best for us.

    Thanks again Chris for all your great articles. I hope that 1 day i can join your course and reap the benefits.

    All the best.

    SS

    • Hello Sahil,

      Well said regarding soccer, especially since I played for a few years – definitely have to agree with you.

      The idea of daily charts are best or most profitable, or quality is better than quantity is just not true, and vice versa.
      Find out what works best for you, and then maximize that edge.

      Thanks for sharing mate.

      Kind Regards,
      Chris

  • Chandrashekar

    Gr8 article, looking forward to be your student.

    • Hello Chandra,

      Thanks for the kind words and hope to be working with you soon.

      Kind Regards,
      Chris

  • ray

    Super Good work Chris..

    • Thanks Ray,

      Glad you liked it mate.

      Kind Regards,
      Chris

  • peter ward

    Enjoyed your article a lot … now working with 500k capital with three day clearing rule … i am often at loose ends how i should trade my money more efficently

    • Hello Peter,

      If your strategy has an edge, then all you need to do is maximize that edge. The key is to have a rule based system and have a baseline of performance. Then you can start working with the numbers on how to maximize it and trade more efficiently. But if you do not have a rule based system, then this would be the first step.

      Hope this helps, and if you are looking for an investment vehicle in forex, feel free to check out my fund (http://kronosfx.co.uk/) which may be a workable solution for you.

      Kind Regards,
      Chris

  • Nazaar

    Another excellent article covering important issues with well presented ideas.

    “Hopefully this article will put a lot of the mis-information to rest,” … it did, thanks.

    “and give you a new perspective on this critical subject.”
    again, it did. This made a lot of sense and brought some clarity to me.

    Thanks Chris.

    Nazaar

    • Hello Nazaar,

      Thank you for the kind words. Please make sure to share this article and link to it on any blogs as its a critical subject which a lot of developing traders being mis-informed on the subject.

      Thanks again for your positive comments.

      Kind Regards,
      Chris

  • Abdirahim Jama

    Hi Chris!

    Another great article that clears things up! Looking forward to your next article.

    Keep up the good work you are doing!

    Kind regards
    Abdirahim Jama

    • Hello Abdirahim,

      Thanks for the kind words and am glad it cleared some things up.

      BTW – this blog was voted a candidate for the best blog out there;
      http://www.winnersedgetrading.com/best-forex-blogs/

      So if you can, please make sure to vote as the support and help is greatly appreciated.

      Kind Regards,
      Chris

  • Abdirahim Jama

    I already did, I’m a member of your price action course forum. I go under the name of “Bilal30”

    • Thanks mate (Bilal),

      Much appreciated and its good to work with you on the course as you are starting to come along well so keep at it!

      Kind Regards,
      Chris

  • riga

    hi chris, i agree with some of the things you have said but i think for new traders and learners, quality is definitely more important than quantity, when you talk of trading in quantity you are assuming that the trader in question can spot the quality set ups, quantity is nothing without quality, in fact quantity with out quality is losing money, whereas quality without quantity is more likely to make money.Its like someone learning to drive, when they are new to it their brain will not be able to process turns and corners and so on at the kind of speed and ‘quantity’ that an experienced driver can, hence experienced drivers can drive faster with more accuracy and make more turns than an inexperienced driver, i would say its the same for trading, a new trader has to start with quality and eventually quantity will come. Thats my thinking anyway :)

    • Hello Riga,

      First off, I agree that in the beginning quality is better than quantity for the most part and have stated this before. But I assume nothing in regards to the trader being able to spot the quality setups. There are some traders though that are not as ‘fragile’ with making mistakes or failing, thus the quality part is not as crucial for them, as they learn better by repetition/quantity and thus – a lot of feedback instead of a few smaller instances.

      However, the argument ‘quantity is nothing without quality’ does not hold up. Take the casino for example – many of their games they offer, they only have a 1-4% edge which is tiny, yet if they do it 1000’s of times a day, they make a ton of money. This is what HFTs do as well, getting pennies or fractions of pips, but 1000’s of times over and make money.

      As I said though, in the beginning, I always suggest starting out slow, then working their way up, so we agree, but that does not mean their goal should not be to repeat their edge further.

      Kind Regards,
      Chris

  • DR. KAZI MOHIUDDIN AHMED

    very helpfull articles

  • George

    I even go as far to say you learn faster on smaller timeframes! If you have the time to watch PA for a few hours every day, and slowly start trading on, let’s say M15 / M5, you learn PA, Patterns AND your Plattform a lot faster, than to wait for 1 or 2 H4 signals a day.
    Thanks Chris for the great insight! George

    • Hello George,

      Indeed. Does a poker player learn more by playing a few hands an hour, or 50? Do they get more experience by playing one online table, or 4? Most play many and for a good reason.

      Now that doesn’t mean we hammer away blindly. We always practice with a deliberate focus and intention, and there is a sweet spot for that.

      But glad you found this useful.

      Kind Regards,
      Chris Capre

  • premnath

    Hi Chris
    Take Care
    Thanks for guiding us and holding our hands by these articles.
    Dont know how you manage to do this for your students in the 24 hrs we have.
    Have a good Xmas and a great new year
    regards
    student
    prem