From the February 2013 issue of Futures Magazine • Subscribe!

Minimizing loss: Run-length trade statistics

Measuring the pain

Given that trade psychology is so important, it should play a role when this strategy is put online against a live account. “Performance report” (below) provides some of the typical performance detail used to evaluate a strategy and manage it once it goes live. Of interest are the maximum number of consecutive losing trades, because a trader will want to know the extent of the pain that must be endured in running a strategy; or more objectively, how many losing trades to expect and endure before prematurely giving up. In the case of the simple fade strategy, over the last three years, six losing trades in a row would have to have been endured to realize the equity curve. Is the trader prepared for this? 

To answer that question, it is helpful to know basic winning and losing run-length statistics. For example, if a trade strategy has a per-trade winning percentage of X% (say 50%, or winning half the time), and the strategy is run for N number of trades, how many losing trades in a row are expected?

We can provide some basic background to answer the winning/losing runs question. Knowing the basic statistics of trade winning and losing runs will help prepare the trader for the emotions of executing a strategy, as well as provide objective measures for when either to stay with it or throw in the towel.

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