I have to agree with the above posts. Margin requirements might even impose a mathematical limit after a losing streak. That's kind of a enforced risk management. Therefore one cannot logically generalize and say that trades are independent; one might make the conclusion specifying some other limited context. Also psychology as someone pointed out earlier is a valid argument contradicting independence of trades.
Why don't you do a statistical test on your trades and find out? And also, to be independent in the "statistical view" either the market or the entries would first have to be random (right?). The market isn't, but a trader's entries might be (random on purpose, or no better than random).
In my view the trades are independent... BUT the traders emotions are not. People's emotions are non-random because if I feel bad now it is likely that I will feel bad one hour from now. So the one reason to reduce your bets is to keep your emotions in check. For example when you had a super winning streak, you feel good and you don't want to spoil the good work with some stupid trade, i.e. you don't want to lose and you become more sensitive to the losses. The same when you had a losing streak - you become to sensitive to any subsequent loss, you regret that you had so many losses and don't want to lose any more. So all you need to do is reduce your trade size a bit so that you can stand the volatility and stay rational. After all you not only want to make money but you need to feel good about what you do. The second reason is that the way you feel when you make trading decisions will affect the quality of these decisions. Even a systems trader will have to press the buy or sell button and if he feels regret or fear or hope, he will make bad decisions. I am a discretionary trader however and I don't know if system traders have any additional subjective filter that they use to choose which trading signals to take. If they don't have then it makes no sense for them to change their bet size. But I guess that their confidence in their system will be influenced by their performance and that will inevitably affect their trading. As Al Pacino said in the "Devil's Advocate" : "Changes everything, the pressure....Some people you squeeze 'em, they focus, others fold..." So adjust your bet size so that you don't put yourself under too much pressure
Let's keep it simple, and in clear English. Independent OF WHAT? The market? Your results? The price of tea in China? If you have 5 winning trades in a row, there's some probability that you are in tune with the current cycle. Or it may be just luck. Almost impossible to determine. And vice versa. So the question is moot. Since you or your system use a given method(s), then each trade is connected by that fact, and can't really be considered 'independant' . Trading is not a coin flip, unless of course, thats the method you use.
If you risk 2% on each trade, and have a loss, you will still risk 2% on the next trade, it's just that you're risking 2% of the amount you have left. If you have 100K capital and lose 2K, on your next trade you'll only risk $1960 on the second trade - which is 2%. If your trading system has a 50% win ratio, and you lose 8 straight bets, you're still down a lot less than 20% What of the odds of 8 straight losses - about one in 600. And if you make 600 trades per year, how often can you expect 8 straight loses? Once every 12 months. Pretty high isn't it? The vast majority of trading systems never do better than a 50% win ratio. The money is made by having bigger winners than losers - not picking great trades. Bigger wins come from money management. Bet size has nothing to do with trade independance, it has more to do with probability and the theory of long numbers. I have often found that during long painful drawdowns, your trading account often returns to an equity high really quickly. Sometimes with only three or four trades. But if you've got no capital to bet with, it really doesn't matter. Runningbear
Hello folks: The answer to the question is that the RESULT of each trade is independent. I assume that the person who asks the question does not have a background in stats, so I wont go into the issues surrounding dependency and covariance. Regarding the question of why you need to scale down position size, again there seems to be a misunderstanding about the basics. While the result of each trade is independent, the trades themselves have a tendency to be "correlated" because they are selected by a human operator with a specific point of view. This is why it is a good thing to scale down when you lose, and scale up when you win. Good luck. Steve46
Well, let me get everyone in place... Market and Trades are separate. 1. Are markets independent from the previous day? Are each pattern independent? etc. etc... That's one thing that needs to be clarified. Regardless of the pattern, edge, or other stuff the market does and which you extract and perceive... are all of them independent??? This really depends, if there are enough people following the same pattern the same way, at all times, then I'm sure there would be some serial correlation in the following re-action of the specific pattern. But as all, or most, system traders know... systems fade and stop working. But this goes with discretionary traders too. The importance is the constant exposing and extraction of the market for system traders and adjusting adaptation for the discretion trader. So... 2. The question goes into how you trade. If you've been trading for some time, it's obvious you don't trade the same way you have since you started. I'm sure I don't... Regardless of shift in objectivity or just a shift based on the market... one thing to consider is whether the trader's trades are consistant. In an ideal world where markets don't change, then I think there's some debatable point but markets change and traders change. So... It's equally important to ask whether you have been consistantly trading a certain way. Are trades independent? No, it can be but I'm not stopping you from doing it. Am I, can't speak for others..., independent from previous trades? No. I'm sure and guarantee I won't be... I used "trades"... not trade()...
the results are independent, but the trades are not? what shall that mean? what is the difference between trade and result in this case?
No problem, thats not a bad question. Take a moment to think about it. The result is you win or you lose. The switch is on, or it is off. The selection of trades is not that simple however. It is based on a point of view, and a selection process that includes some type of indicator, system or philosophy. That view of the market is what causes corellation. You can't help having that viewpoint any more than you can help being left or right handed. If your viewpoint happens to be the right one for the market you are in (and you scale up as you win) you will do pretty well. If conversely your viewpoint is wrong for the market you are operating in, you will consistently choose wrong, unless you recognize the problem and adjust. One of the adjustments is to scale back when you are losing. Good luck everyone. Steve46