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Largest win

The best single trade in a record, which should be checked for how much of the total profit it represents.

A record showing $60,000 of profit across 300 trades looks robust until the largest win is $34,000. Remove it and the strategy is marginal; the other 299 trades produced $26,000, which is $87 apiece before costs.

Compute the concentration deliberately: total profit minus the top three trades, divided by total profit. If the remaining figure is under half, results depend on rare outliers, which has two consequences. The strategy needs a much longer sample to evaluate, and it requires the discipline to hold winners long enough to catch them - a trader who takes profits early will not reproduce the record.

For positively skewed strategies this dependence is the design, not a flaw. The mistake is applying the risk-management habits of a high-win-rate system to one whose entire edge lives in its right tail. See outlier-dependence and return-skew.

Related: outlier-dependence, largest-loss, return-skew, scaling-out

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

The volatility smile across strikesImplied volatility plotted against strike, dipping near the money and turning up at both ends, more steeply on the downside.Implied volatility32%28%24%20%8090110120Puts below the money cost moreFar calls cost more tooLowest IV near the moneyATM 100Strike price
The volatility smile. Options on the same stock and the same expiry are not priced off one volatility. Strikes near the money carry the lowest implied volatility, and it rises towards both ends — usually faster on the downside, which tilts the smile into a skew.

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