How Many Losing Trades Can I Get in a Row?
First, the principle is the same, whether it’s a winning streak or a losing streak. Second, the answer is not what you think. I’m telling you right now – “This Is Really Important!”. This is a really important concept for you to understand before you begin trading any system. So read every word, do both exercises and hopefully in the end you will be convinced. And “Don’t Fool Yourself, This Will Happen To You!”
What Does 50% Trade Probability Really Mean?
50% Trade Probability DOES NOT mean you will win every other trade. What it does mean is that over a period of time, you should win 50% of the trades – that’s totally different. The best way of illustrating this to yourself is to flip a coin 20 times in a row. (This is exercise 1) Write down the outcome of each coin flip in order on sheet of paper. After you have flipped the coin 20 times and looked at your results, the first thing you will notice is that you probably have 2 or 3 (or more) of either heads or tails in a row. That means you would have had 2 or 3 wins or losses in a row trading a 50% probability system in your first 20 trades. These streaks can and do get MUCH LONGER – both winners and losers.
How Many Losses in a Row Can I Expect with a 50% Trade Probability?
Over a period of 100,000 coin flips, it is a near certainty you will experience a streak of at least 16 all heads or all tails coming up in a row before your next flip results in seeing the other side. In addition, it will probably happen more then once. That’s 16 losses in a row, before your next win! NOW you begin to understand the true importance of position sizing. (see “The Most Important Element in Successful Trading”) As long as you are continuing to follow your system’s trading rules, you are doing nothing wrong – its just a normal streak. But continuing to believe in your system becomes really hard during that streak – indeed, its one of the hardest parts of trading. Losing streaks can mess with your head.
What Do You Mean – 50% Trade Probability Can Give Me 16 Losses in a Row?
So you don’t believe me? I can prove it and you can prove it to yourself too. (No I’m not going to have you flip a coin 100,000 times). There are no tricky formulas here, this is a ‘brute force’ test, meaning this really does involve 100,000 coin flips, but the computer does all the work. But first one more thought before the last exercise.
Does That Mean If I Experience 16 Losses in a Row, My Next Trade Will be a Winner?
So let’s assume you believe me for a minute and ask the question above. Sorry, but the answer is absolutely not. Each trade still has a 50% probability of being a money making trade and a 50% probability of being a losing trade. It doesn’t care if you’ve had a long winning streak or a long losing streak, the trade still has the same probability of winning that it did yesterday.
The Final Exercise Today in Trade Probability
You will need access to a program that can run an excel spreadsheet for this exercise. Once you have downloaded the spreadsheet, try running the test several times because the numbers will change each time and you will see the size of the longest streaks get higher or lower.
The spreadsheet, which you can download below, will allow you to “see” the actual streaks as well as tell you the longest win streak, the longest losing streak and final win/loss ratio. It is a fairly large spreadsheet with over 400,000 calculations, but it is not complex to use – you only have to enter 1 number – that’s it. The instructions for using the spreadsheet are contained within the file itself, but in case you miss them, “The calculation mode is set on Manual, so you will need to press the <F9> function key to actually calculate the spreadsheet”.
The downloadable spreadsheet actually uses a random number generator to perform “the coin flip test”, so you can test the size of the longest streaks based on any Trade Probability – 45%, 50%, 60%, 70%, etc, so investigate to your heart’s content – Just totally understand that you WILL experience “Large” streaks both good and bad.
Losing streaks are why you must read and understand “The Most Important Element in Successful Trading”.
You should also check out “How Streaks in Trading MESS WITH YOUR HEAD”. Read it and be prepared, because both winning streaks and losing streaks happen to everyone in trading – and they will happen to you.
You can download the “Coin Flip Test” spreadsheet by clicking the “Download” Button below. You will then need to uncompress the file before you can use it.
Please leave your comments, I really want to hear what you think.
Did these exercises help to drive home the point that the size of any streaks you expect are much larger than most would guess?
Did the “Coin Flip Test” spreadsheet help?You Like? Please share! Questions? Put them in the comments below so everyone can learn. Thanks, Gene