[SERIES#2] A) Understanding Losing Streaks 101
Index:
Series#2: Understanding Losing Streaks 101
A) Understanding Losing Streaks 101
Generally, traders fall into 2 camps…
Either you trade a system that has a high win rate collecting small profits along the way OR a system with a low win rate while trying to profit from big home runs.
I am in the camp of having a low win rate but hope to hit big winners along the way. I think, when it comes to this type of home run trading, understanding the concepts of losing streaks and grasping consecutive loss statistics can put into perspective what you will inevitably face when trading. Obviously, there is a big difference between knowing what to expect and experiencing it firsthand, but hopefully, this series will allow you to plan accordingly.
For me, I normally don’t have a problem with over-trading. My problem is not pulling the trigger when I know that a trade needs to be made. This type of fear is probably associated with many things, inexperience being one of them, however, there is also a fear of losing money. Even more when you haven’t hit a big winner in a long time. As of right now, I am on an 11-trade losing streak. Take that in, each time I have opened a trade, I have closed the trade at a loss, 11 times in a row. Although relatively small losses (because I think I have decent risk management), these can add up not just from a PnL perspective but also mentally. For most people, including myself this can be demoralizing. This is why I wanted to create a series like this, in order to help traders understand the statistics behind consecutive losses and have the realization that losing multiple times in a row is just part of the game when using a trend-following system.
One thing to note, a losing streak, which is similar to a drawdown isn’t the same thing. They can be, but I think there is something more sinister with a losing streak rather than a simple drawdown. With trend-following systems where making 5 -10x risk-to-reward trades is vital for survival, you will most likely (myself included) be in a drawdown 70-80% of the time, which is normal. Now losing streaks in this type of system will also be normal, just because of how low your win rate will inevitably be. But when it comes to consecutive losses, I think we underestimate the impact that a very long losing streak can have on oneself… I know I did.
Series Topic Ideas:
Expected Loss Sequence
Losing Streak Probability
And more…
All of these concepts will be in the same vein but just different ways to view losses. More so to understand the perspectives associated with consecutive losses to help your trading process (and mine as well).
-F4VS