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Chance of Consecutive Losses

  • #21
  • Jan 23, 2011 10:02pm Jan 23, 2011 10:02pm
Quoting ForexQuant
Yes, because they are no longer independent unless these pairs have 0 correlation.

p/s: if you can prove that you have 97% winrate system (and R:R = 1) without using martingale or average down technique, I will happily to teach you how to get rich quick (very quick!) beyond your wildest dream, without risking too much.
I'll bite. How about a 100% theoretical win rate system. Buy and Hold the Dow for 50 years. Feel free to run monte carlo, bootstrap, or any other test to validate that proposition. Now how am I going to get rich very quick beyond my wildest dream? I've got a few bucks to spare.
  • #22
  • Jan 23, 2011 10:14pm Jan 23, 2011 10:14pm
Quoting jamjamjam
I'll bite. How about a 100% theoretical win rate system. Buy and Hold the Dow for 50 years. Feel free to run monte carlo, bootstrap, or any other test to validate that proposition. Now how am I going to get rich very quick beyond my wildest dream? I've got a few bucks to spare.
Do it for 500 years, it is only 10 times of your average holding time, which is relatively short and quick compare to most trading systems.
  • #23
  • Jan 23, 2011 11:02pm Jan 23, 2011 11:02pm
I do not dispute your numbers. What I am saying is that those probabilites are of little to no use to you as one, small, retail trader. If you run 1,000 series of 1,000 trades you will see what I mean. There will be many of those series that have little resemblance to what those probabilites would "expect" them to look like. Any one of those type of series, if realized by an individual trader, would be more than enough to wipe them out... probably multiple times.

As to overcomming negative expectancy..... I don't see many retail bucketshops going out of business. Nor do I see many casino's closing due to table or slot machine losses. Negative expectancy is inherent in the rules of both businesses. Price is to random on an minute by minute basis for short term daytraders to overcome this inherent disadvantage. It can be overcome on longer time horizons.

Good fortune and trades to you and all...

Regards
  • #24
  • Jan 23, 2011 11:44pm Jan 23, 2011 11:44pm
Quoting FX-Petra
I do not dispute your numbers....
Good fortune to you too.
  • #25
  • Jan 24, 2011 12:20am Jan 24, 2011 12:20am
I think I have found what I am looking for. Again, thank you for your help.

My system takes approximately 1000 trades in a year. Given the expected ROI, initial equity I have, and financial goals, I would expect to need to take 5000 total trades (over the next 5 years).

Using the above equation(post#15), I can calculate that there is less than 1% probability(0.4%) that I will hit a sequence of 4 consecutive losses in 5000 trades. (0.01% chance to hit 5 consecutive losses)

Based on this knowledge, I can calculate how much risk per trade I may use(post#1). If I can stomach a 20% drawdown, then I can risk 5.7%.

To summarize, I may risk 5.7% per trade with a 0.4% probability that I will have 4 consecutive losses in the 5000 trades I will take over the next 5 years.

(And yes, Petra, I hear you. I realize there are crazy things that can happen in forex that would make these calculations useless)
  • #26
  • Jan 24, 2011 12:37am Jan 24, 2011 12:37am
Quoting optojay
I think I have found what I am looking for. Again, thank you for your help.

My system takes approximately 1000 trades in a year. Given the expected ROI, initial equity I have, and financial goals, I would expect to need to take 5000 total trades (over the next 5 years).

Using the above equation(post#15), I can calculate that there is less than 1% probability(0.4%) that I will hit a sequence of 4 consecutive losses in 5000 trades. (0.01% chance to hit 5 consecutive losses)

Based on this knowledge, I can calculate how much risk per trade...
Have you ever think if this happen? LLLWLLLWLLL...none of them hit 4 consecutive losses but you still doom.
  • #27
  • Jan 24, 2011 1:58am Jan 24, 2011 1:58am
Quoting ForexQuant
Have you ever think if this happen? LLLWLLLWLLL...none of them hit 4 consecutive losses but you still doom.
Listen to this guy. What you are forgetting here is the risk of ruin.

Nothing like making a million dollars and losing 200k in 2 trades. Your pick
  • #28
  • Jan 24, 2011 12:48pm Jan 24, 2011 12:48pm
Quoting ForexQuant
Have you ever think if this happen? LLLWLLLWLLL...none of them hit 4 consecutive losses but you still doom.

Yes, I realize that is a possible sequence of events. Of course, it is highly unlikely with a 97% win rate. That's why my last post had an associated risk applied (ie. there is 0.4% risk that 4 consecutive losses or worse may happen).

Nothing is for certain, but if the chance of greater than 20%DD is 0.4% over 5000 trades - those are numbers I can live with. If I understand correctly, the math is saying if I repeated the next 5000 trades 250 times, I would expect to hit 4 consecutive losses once. Said another way, 249 times I would not have any 4 consecutive losses at all.

But maybe I'm not understanding the math entirely. Isn't the scenario you mention covered by figuring out the chance of NOT having zero consecutive losses? (ie. we calcuated chance of zero consecutive loss and subtracted from unity - so this covers the scenario of LLLWLLLWLLL)

Perhaps I have to add up the chance of 3 CL and 2 CL when I determine how much to risk on each trade.
  • #29
  • Jan 24, 2011 1:03pm Jan 24, 2011 1:03pm
Quoting thelws
Listen to this guy. What you are forgetting here is the risk of ruin.

Nothing like making a million dollars and losing 200k in 2 trades. Your pick
That's exactly what I am trying to figure out - instead of risk or total ruin, I'm trying to calculate risk of losing 20%. All the while maximize my ROI.

Don't worry, thelws. I am aware of proper money management and blown accounts - I won't do anything stupid.

When working with percentages, I agree it does sound absurd to lose 200k on a 1M account. However, (assuming liquidity is not a problem) it is no different than losing 2k on a 10k account. I think your point is that your comfort level for risk changes depending on the account size.

So what if my calcs had said I should be risking only 0.1% per trade? Then typical MM of limiting your risk to 1% of account equity would be crazy right?



I see Hanover did some similar calcs here:
http://www.forexfactory.com/showpost...3&postcount=56
  • #30
  • Jan 24, 2011 1:52pm Jan 24, 2011 1:52pm
Why am I trying to find my max risk per trade?

Because the amount you risk can make a huge difference when compounding. If I make 5000 trades and my risk per trade is:

a) 0.01%, then my ROI is 28%
b) 0.1%, ROI = 1122%
c) 0.5%, ROI = 2.6x(10^7)%
d) 1.0%, ROI = 6.6x(10^12)%
e) 5.7%, ROI = 1.9x(10^60)%

NB: these values are not calculated using a standard compound interest formula as I had to account for my losses. (eg. if I had no losses and risked 0.01% over 5000 trades, the ROI would have been 65% not 28%).

So as you can see, if I increase my risk by one order of magnitude - my ROI increases by an exponential amount. 0.01 to 0.1% increased ROI by 2 orders of magnitude. Increasing 0.1 to 1% increased ROI by 9 orders of magnitude.

Food for thought...
  • #31
  • Jan 24, 2011 5:20pm Jan 24, 2011 5:20pm
Quoting optojay
Nothing is for certain, but if the chance of greater than 20%DD is 0.4% over 5000 trades - those are numbers I can live with. If I understand correctly, the math is saying if I repeated the next 5000 trades 250 times, I would expect to hit 4 consecutive losses once. Said another way, 249 times I would not have any 4 consecutive losses at all.
at least once, not once.

Quote
But maybe I'm not understanding the math entirely. Isn't the scenario you mention covered by figuring out the chance of NOT having zero consecutive losses? (ie. we calcuated chance of zero consecutive loss and subtracted from unity - so this covers the scenario of LLLWLLLWLLL)

Perhaps I have to add up the chance of 3 CL and 2 CL when I determine how much to risk on each trade.

Ops I must rephrase my sentence. That equation should not be interpreted as chance of NOT having zero consecutive losses over N trades, it should be chance of NOT having zero time of n consecutive losses over N trades.

So it does not cover the said scenario. And you cant simply add up chance of other consecutive losses because you will over count some cases.

Anyway if you are using fixed fractional position sizing (compounding), you should not use the consecutive losses to estimate your potential DD because the sequence of losses is not important in fixed fractional position sizing. It is the total win and total loss that matter in DD estimation.
  • #32
  • Jan 24, 2011 10:08pm Jan 24, 2011 10:08pm
Interesting...

Well, at least the chance of more than one consecutive sequence should be even less probable, so it shouldn't add too much.

Yes I use fractional position sizing (ie. a set precentage)...
  • #33
  • Mar 3, 2011 3:56pm Mar 3, 2011 3:56pm
Interesting - I found something along the lines of why I started this thread.

myFxBook has a calculation of Risk of Ruin that gives you an idea of what the chance of a specific amount of drawdown will occur.
For example, under advanced statistics, click on "Risk of Ruin" at the link below(this is just a random account I was looking at, no affiliation to me):

http://www.myfxbook.com/members/fxgr...owth-bot/71611

I don't know if their calculations are accurate, as I couldn't find any details.
I think they are using RiskofRuin = 1/{ [(1+expectancy)^(initial capital/risk)] }.
Calculating how many consecutive losses are required could be based on some of the logic already presented in this thread.
  • #34
  • Last Post: Feb 25, 2015 4:41am Feb 25, 2015 4:41am
Quoting ForexQuant
{quote} p/s: if you can prove that you have 97% winrate system (and R:R = 1) without using martingale or average down technique, I will happily to teach you how to get rich quick (very quick!) beyond your wildest dream, without risking too much.
I guess I developed a %100 win rate trading system finally and ready to hear your proposal for the final step, if you are still around !
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