Sunday, January 11, 2015

Did I know something?

I don't know if I had a premonition about all this, but a few months back I posted the following scenario. Given the run of losing trades I encountered in the second half of 2014, this post almost seems prophetic:

"No one like a run of losing trades. Yet they have to be expected.

Suppose you have a method that over a long period of time has a historical win ratio of 40%. So, on a sample of the next 100 trades, you would expect to have 40 winning trades. What you don't know is what order the winning and losing trades will appear. In the most extreme example, it is mathematically possible that the first 40 trades in that sample will all be winners. You could then suffer a loss of 60 trades in a row. Or, you could have 60 losses in a row to begin with, followed by 40 winners.

How would you deal with those two scenarios, both emotionally as well from a risk control point of view? You've still hit your historical average of a 40% win rate, yet over those 100 trades you would have suffered an emotional rollercoaster.

The other point to consider is the size of the average wins and average losses. The calculation using all these numbers with the win/loss ratio determines the overall expectancy of the system."

Now, the list of trades as shown here over the last few months does not make for pleasant reading. There were a couple of specific issues I've referred to in recent posts such as here and here which will have addressed at least some of this.

My own view is that this run of losing trades has tested my discipline and commitment to trend following. It has proven the benefit of cutting losses as soon as possible, as well as the rigid risk control you need. It has made me stronger. And, in the view of the next 1,000 or 10,000 trades, it is merely a small blip on the journey.

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