"The worse case is that all trades , winners or losers,ARE RANDOM.If that's the case ,there is no difference between starting after a positive or negative streak [...] The big question is if the system will continue working.I've done tons of research on that and have not found anything that predicts if a system or approach will continue to make money" /R. Vince/ Agree, however: What if I`ve done tons of research as well and while there is no indication whether the system will continue to work, I`ve found in many cases that actually it is important whether you increase position after negative or positive streak. I know also by my own experience that many system traders start trading new strategies after losing series. Are they wrong ? Is this just psychology behind it or something else ?
I think that if you have a good system, then you can evolve or tune the system after a losing streak, but to scrap it completely and start a new system is a little radical. In fact, I think that any good system needs to be in an almost continuous state of tuning to the current market conditions.
richtrader, absolutely right, how about sizing ? I know many traders increase their positions after losing trades corresponding with average losers of the backtested system.
That is the big question. I've seen different approaches and people contradicting one another with regard to this. My approach is a volatility based position size which I do my best not to vary based on losing streaks, etc. Taking bigger positions after losing streaks is a quicker way to ruin if the streak keeps going, which it can as we've all seen in this market environment. But I am very interested in money management and optimization, and I don't think I'm trading optimally yet in this regard. I am particularly looking forward to this book when it comes out: Money Management Book
The only reason to wait for losing trades before starting a system is if there is a negative serial autocorrelation. If there isn't, what's the point? If you don't know, check it!
This might be more evident in a pullback to MA type of system, where the losing trade will usually be the last pullback (fake) of a dying trend , where it then fails and starts a new trend. By this logic, your next entry would be the first pullback of the new trend... which is normally successful.