So how many losers in a row will you have ?
I think one of the most difficult things to do in trading is to sustain one’s enthusiasm when we are in a period of draw down.
To many traders a period of draw down is something they had not really considered as a possibility so when it arrives it comes as something of a shock. As with most things in life the better prepared we are for any eventuality the more able we are to cope with it when it does materialize.
So it is important in trading to be realistic and be aware of the probabilities of having quiet long sequences of both winning and losing trades so that we have a feel for what we might expect in real life trading.
If you make the assumption that we have 50% winners and 50% losers then the chance of the next trade being a losing trade is 50% ie 1 in 2.
The chance of having two losing trades in succession is 50% times 50% equals 25% ie 1 in 4
5 losers in a row = 3.125% say 1 in 30
10 losers in a row = 0.0976% say 1 in 1,000
20 losers in a row = 9.5367% (E-5) say 1 in 1 million
Clearly if you feel you will be able to sustain 70% winners over the longer term then the probabilities would be less. For instance five losers in a row with the win loss ratio of 70% would only occur about 1 in 500 occurrences
Whilst these ratios may not appear too frightening the real problem is that as traders we are in a continuous game and over a trading career will place thousands of trades.
For instance assume you put on five trades a day which would be around 1000 trades per year. This means that you would expect to incur a string of 10 losers in a row (based on 50% winners and 50% losers ) on average once in every year !
So if you are risking a large portion of your equity on each individual trade be aware that it is only a matter of time before you blow your account up – that losing streak will come – it is ordained in the arithmetic !
How do we get around this problem ? well on both of the training courses I give you a couple of techniques that professional traders use to ameliorate the problem of such long losing sequences.