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# Money Management Question - Need Help

Discussion in 'Risk Management' started by ES335, Jan 21, 2007.

1. ### ES335

From Acrary: "How often should you hit a new equity high? It can be calculated by using the % losing trades. Here's how, take the % of losing trades and multiply it by itself until the number is approx. .01 (meaning 99% chance of seeing a run of however many times you do the mutiplication). For example, if I have a method that loses 40% of the time, then the number will be (.4*.4*.4*.4*.4 = .0124). This means a method with 40% losers will have no more than 5 losers in a row 99% of the time. Next, take the number of consecutive losses and multiply by 3. In this case, the number will be 15. This is called the trading cycle. The cycle is the maximum number of trades that should happen before a new equity high is achieved. Draw a line every 15 trades on your statements and make sure a new equity high is hit within the 15 trade period."

I was wondering if someone could clarify the above from Acrary. He recommends having at least 100 trades in your sample to start with. Ok, so let's say you win 60%, lose 40% in that 100 trade sample, so 60 winners, 40 losers. The probability of 5 losers in a row is 0.4 raised to the power of 5 which is ~ 1%.

(i) So does that mean that once out of 100 trades, you can expect to have 5 consecutive losers and that out of 200 trades, you can expect to have a run of 5 consecutive losers occur two times?

(ii) Also, what would happen if you are using n systems, each with its own win rate and the sum total of all trades from all systems would lead to a given win rate as well. How would you compute the probability of consecutive losers? Could it be that diversification of multiple systems could also lead to a lower probability of consecutive losses? Does anyone know the math for this?

(iii) Back to Acrary: Why does he multiply the number of consecutive losses by 3 to get to the trading cycle? Does anyone know the reasoning behind this?

Nitro, Aaron, anyone out there with math skills who can help?