This is great, and your spot on. I don’t know what would bother me more, winning to much or losing to much. If your winning to many trades than you should be (against past performance, the ratio of which your trading strat is geared upon), chances are that your losing streak is also going to be larger also.
This just proves that you (all traders) need a trading plan which is built on statistics of past performance. Without it you may as well be trading blind. You wont know what is acceptable and what is not.
FXAssassin, what you may not be bearing in mind is your taje profit vs. your stop loss. If my take profit is 60 pips and my stop is 20 pips I will only need to succeed in 30% of my trades (3 winning trades and 7 losing trades) in order to profit
You’re right that you only need to win 30% of the time in order to be in the money, but it’s important to always keep in mind the other factor that goes along with such a low winning percentage. If you are losing 70% of the time, then you need to ask yourself what the Max losing streak you can expect to endure is over the course of your lifetime of trading.
With a 30% win ratio, the max losing streak is 30 losses in a row over the course of 50,000 trades. Now, you might not be able to envision such a unbelievably long period of losing. After all, you just need one winner somewhere along the train ride to 30 to cause it to “not be” 30 in a row, right?
It’s important to never allow yourself to think like this. If you allow yourself to think along the lines of , “I know that the math and statistical probability says that I WILL have a 30 loss streak over the course of 50,000 trades…but I don’t think that will REALLY happen to me.” you are saying the same thing as “I know that 2+2 is going to equal 4 for everyone…but I don’t think it will for me.” Sure, the numbers are bigger, but they’re just as much founded in math. There, might be standard deviation from this 30 loss number, but remember, you’re just as likely to be the guy to go 31 losses sometime in your career as you are to be the guy that only sees 29 losses. Either way, the standard deviation isn’t going to be 10…as in you’re the only guy who will only see a 20-loss streak over the course of 50,000 trades. You’re not going to be that lucky, and if you think you are then your thinking has crossed over from smart investor to gambler.
So, now that we are all in agreement that anyone with a 30% win ratio will see a 30-loss streak over the course of his trading career, lets bring the rest into focus. That 30-loss streak is the MAX one can expect to bear. Assuming that you are trading on lower time frames and get 400+ signals p/month across all the pairs you trade, that means that you’ll see everything less than that at some point in time. You’ll hit 22 losses and a month or three later 20 losses and then a couple months later 21 losses. Every WEEK (if you’re taking 400+ trades p/month) you’ll see 13, 14, and 15 losses in a row. These types of losing streaks would be a normal day at the office for someone with a 30% win ratio.
Don’t lie to yourself and say that this won’t be so. I keep backtesting month after month with a 40% win rate system and every month I see a 13-loss streak show up. Losing eight or nine in a row happens at least once a week. With a system that loses fully 25% more, it is very safe to assume that you’d better have skin as thick as a crocodile. Yes, you’d end up a winner at 1:3 with a 30% win ratio…but do you have the mentality to see your account balance shrink substantially every month as you hit these losing streaks without deviating from the plan or trying to do self-destructive things like dialing down your position size so that when you hit a winner it’s not powerful enough to overcome the losers? I’m guessing that few have this type of mental fortitude.
I really get confussed with this one. TO avoid the scenario you are depicting I don’t overtrade, the less I trade the more I make, that overides any statistic. If i am doing 4 wins for each 10 trades and overall i make 1 USD profit then with 100 trades i’ll make 10 USD right? Wrong, it is a misconception, winning rates changes over time, it could be mo or it could be less and the more you trade inside a determined period the less focussed you will be.Might not be statistical but it is true, the les you trade the more you make or at least your winning rate the more it rises. Kinda cheetfull and lazy but it works.
I hear what you are saying, but I’m going to just put it out there and say that I think you’re completely wrong. There are just too many assumptions built into this one paragraph. Let’s go through them:
[B]Overtrading = Taking Large Numbers of Trades [/B]- this is an improper definition. First of all, the whole idea of a “large number” of trades is subjective. A scalper tracking 2 or three pairs might literally take over 100 trades in a day. This isn’t “overtrading” for him, but I"m sure you’d probably define it as such. The proper definition of overtrading is taking any trades that are not signaled by your system. If you system calls for 3 trades in a year and you take all of those plus one additional one because you’re bored, then you’re overtrading. If your system calls for 20 trades p/day and you take two extra because they just look like they make sense…you’re overtrading. If your system calls for 300 trades in a given month and you take 300 trades, you’re not overtrading…regardless of how you may “feel” about it. Furthermore, UNDERtrading does not get it’s proper share of the limelight at these forums. Failing to take trades that your system calls for resulting in you not scoring extra money in your account which would have been used to offset losses is just as bad as taking trades that your system doesn’t call for.
[B]Winning Rates Change[/B] - winning rates DO change over time…but do they change ENOUGH to invalidate any particular system. My feelings on this is that the higher the time frame the more of a risk there is for this happening. The lower time frames are not at such risk for this because the so-called “noise” on the lower time frames which everyone complains about is people getting greedy or fearful in the short run. Since people will ALWAYS get greedy in the short run, if you build a system which specifically taps into this phenomenon, then you have what amounts to as close as you can get to a guarantee as possible.
Just look at it this way. If you have a system which has demonstrated a 0.40 win rate over a sample size of 20,000 trades, do you know how glaringly different the market would have to become in order for the huge weight of 20,000 trades to skew down past 33% (the break even point for a 1:2 system)??? On the short time frame, this would mean an extensive period of time where everyone all agreed that price was right where it belonged and thus created a twisted range which would move just enough to signal entry but then never move far enough to hit your take profit. Such a situation would require the world to be in a utopia. If the world WAS in a utopia, then that would mean that nobody was ever lacking anything which would mean that we wouldn’t have to worry about making money trading in the first place. Since I don’t see that happening any time soon, I would trust that a system which demonstrated a certain win ratio over the course of a very large sample size might only deviate by 1 to 2 points. That means that if the average is .40 you might swing down to .38 some months…but that would still be profitable…and there’s just as much of a chance that it would swing UP to .42 instead.
[B]The More You Trade…The Less Focused You’ll Be[/B] - this is an unsubstantiated statement. What you should have said was “the more [B]I[/B] trade, the less focused [B]I[/B] become”…but you didn’t say that. Talk to any psychological professional and they’ll tell you that one flawed pattern of human thinking that one can always count on is the fact that pretty much EVERYONE harbors a belief that everyone else is just like them. Your statement that “everyone” will become less focused if they take more trades shows that you share in this type of falacious thought. Everyone is not like you. There are plenty of people who are not become less focused when they take more trades.
Truth be told, what you SHOULD be saying is this: [I][B]“Since I know that I become less focused when I trade more frequently, what can I do to eliminate this weakness so that I don’t become less focused when I trade more? That way I can increase my trade frequency and let my edge work for me?”[/B][/I]
Again…it all comes back the to Casino analogy. While a casino takes part in gambling, it is not in the “business” of gambling like professional “players” are. The casino is guaranteed to win. They will never go out of business because the players took all their money. They will ONLY go out of business because the players like a different casino better. Since this is a hard, mathematical truth, they employ people who execute their “system” (various games) as many times as possible…24/7 even on Christmas Day! Anyone who has a trading edge should do whatever is necessary to make whatever self-changes need to be made in order to be able to trade with the same discipline as a casino manages a craps table.
I’ll bring another thought to the table here - I have no idea how many trades I have that are winners or losers in a row. I would have no clue how to calculate it, would you go by entry date, or by exit date? I can close multiple entries on the one pair at the same time - not always are all profitable, or all negative. How many do I have in a row then? This is why this - whilst mathematically interesting - is not something I worry about.
I make sure none of my losses are large enough to be at all memorable, and so I can keep trading my systems at a 40-45% win rate with no problems.
If you’re working things from an ultra-conservative perspective, then you’re right, it doesn’t matter how many losses you take in a row. If you’re only risking .001% on any given trade, you could take 100 losses in a row and it wouldn’t matter. I’m guessing you’re taking on more risk than that but using the extreme illustrates the point, the lower your risk the more losses you can handle.
The issue of max # of losses comes into play when you’re trying to tune your system to generate max profits. In general, to do that you simply raise the amount that you risk on the average trade as high as possible. With “possible” being defined as the max risk you can use so that when you do take fall into the eventual “black swan event” series of losses, you’re not wiped out.
Indeed, I’m planning to open an account running a Kelly calculated risk profile to test it once I have enough in the ‘normal’ account that any looses will again be small enough that they will not be in any way impacting on my trading any of my systems, but it will require that the account be big enough that it will allow the closest to an exact match with every trade