Wednesday, June 29, 2011

Cut & Paste.

"I skip trades. But, somehow, I skip more winners than losers".

A statement made regularly by struggling traders.

But how is that possible? If you were randomly skipping trades then you'd end up with the same Win Rate and, therefore, the same result over time right??

After reading a recent post by MBAGearhead, I started thinking about the effect that losing streaks can have on a traders psyche.

This "Streak Calculator" says that you'll almost certainly (99.2% probability) experience 4 losers in-a-row during your trading week if you take an average of 20 trades per day with a 45% WR. As the length of the streak increases, the chances of said streak happening goes down.

So what if you habitually skip trades after x losers in-a-row? Logic would suggest that the chance of you bumping into a winner increases drastically after a string of losers as the likelihood of said streak continuing decreases.

Maybe that's why otherwise uptrending equity curves end up looking like a cut 'n' paste job- all ranges and sell-offs with a few rallies left in for good measure...?