Is there a formula that can figure out what the maximum number of consecutive losses your system can have?
Expected number of consecutive losses = LN(Number of trades)/-(LN((1 - Win Rate))) For a 60% win rate you would use 0.60 in this equation.
The number of consecutive losses is of no use if your system has variable-size wins & losses, because that one trade that breaks the losing streak might just be a BE or win 1-tick, where your average loser in that streak is 4, 10, 20 or even 100-ticks. What you need is to estimate your max. drawdown with a given confidence level. Look into using a MonteCarlo simulation, using the trade distribution out of your backtest (or live trading results). Use at least 1-year worth of trading for each iteration of the MC sim. Then use the average & stdev of the max DD of these runs to define your max.DD with a given confidence level.
I ran MC analyses on sample sizes of 100 trades. In order to do that, I had to generate trade lists. In so doing, I had to make assumptions about the standard deviation of the trades since the information isn't provided. I suspect the OP intended for the SD of both systems to be the same. However, the SD is an important characteristic of the trades and would play a role in a MC analysis which I believe is the way to determine which system is preferred.
Really?(rhetorical) That's good and makes sense I guess. Because It doesn't make sense for you to get 10 losses in a row if you have an edge. Do you agree? If your strategy is based on flipping a coin then yeah I think you can get 10 heads/tails in a row easy. Idk... I didn't go to MIT.;-) Thanks man. I heard some other guy talking about this monte carlo thing but I didnt know what the hell it was about. Will definitely look into now. Cheers!
Well from the looks of it, you look like your a real professional trader so I want to ask you: Trading is just a game like Black Jack? (Lol, I just learned Monte Carlo is a casino.)
Cornholio, no matter what else, keep your wallet in your pants. Preferably a zippered pocket. Or, better still, leave it at home.
No, I don't agree. Edge or not, regardless of the win% your trading system has, it will eventually get 10 losses in a row (if anything, it will get there the day your edge is gone, but even though the edge might not be long-term gone, it might be temporarily away). If you don't already know this (attributed to Keynes) : "Markets can remain irrational longer than you can remain solvent. "