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Is this a valid approach from a statistical standpoint?
 Updated: May 22nd, 2012 (09:00 AM) Views / Replies: 1,682 / 12 Created: May 18th, 2012 (09:40 AM) by TraderTed Attachments: 2

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# Is this a valid approach from a statistical standpoint?

 May 18th, 2012, 09:40 AM #1 (permalink) Elite Member Hamburg + Germany   Futures Experience: Intermediate Platform: Multi Charts, Esignal Favorite Futures: YM   Posts: 17 since Mar 2010 Thanks: 13 given, 14 received Is this a valid approach from a statistical standpoint? Hi everyone, I have a question concerning a trading rule, which I have come across from 2 different Gurus. The one explained it directly the other had it somehow hidden in his rules. Here it is in my words: Letīs assume we have a trading strategy that is basically 80% winning, but the outcome is more or less breakeven. So the 20% loosers eat up all the winners. Now the rule is to stop trading when 3 winners came in a row. Because - they say - after 3 winners in a row the probability of encountering a looser gets too high. Now you either stop trading for the day, or at least till the next looser passed by untaken. Is this a valid approach to skip the low probability loosers, and transform a breakeven strategy to a winning strategy? As far as I understand statistics it is not possible to know, where the winners ( or loosers) come in. But is it possible to have a probabilty of a series of winners in a row? Like 3 or 4 winners in a row, with a basic 80% winning strategy for example??

 May 18th, 2012, 09:40 AM #2 (permalink) Quick Summary Quick Summary Post Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.

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 Hi everyone, I have a question concerning a trading rule, which I have come across from 2 different Gurus. The one explained it directly the other had it somehow hidden in his rules. Here it is in my words: Letīs assume we have a trading strategy that is basically 80% winning, but the outcome is more or less breakeven. So the 20% loosers eat up all the winners. Now the rule is to stop trading when 3 winners came in a row. Because - they say - after 3 winners in a row the probability of encountering a looser gets too high. Now you either stop trading for the day, or at least till the next looser passed by untaken. Is this a valid approach to skip the low probability loosers, and transform a breakeven strategy to a winning strategy? As far as I understand statistics it is not possible to know, where the winners ( or loosers) come in. But is it possible to have a probabilty of a series of winners in a row? Like 3 or 4 winners in a row, with a basic 80% winning strategy for example??

You have to keep stats on everything and see how things are affected. But from my experience using a method like that does not work. Probabilities are extremely important but there is just no way to determine whether next trade will be a winner or loser based on previous 3 trades. On a surface level when I look at my stats I think something like that would work but when I put it through extensive testing it does not. It just does not stand the test of time over many trades.

 "The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."

Last edited by liquidcci; May 18th, 2012 at 10:06 AM.

 May 18th, 2012, 12:02 PM #4 (permalink) Elite Member Thessaloniki, Greece   Futures Experience: Beginner Platform: QTS Broker/Data: IB Favorite Futures: Equities, NQ   Posts: 165 since May 2012 Thanks: 104 given, 385 received It's not impossible if there is some sort of relationship between the result of sequential trades. Usually this works the other way around though, i.e. several losing trades may indicate a change in market regime into an unfavorable environment for a particular strategy. Not sure what the rationale would be for not trading after several winners. In any case, you'd have to establish such a relationship robustly by analyzing a long sample of trade results.
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Elite Member
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 Hi everyone, But is it possible to have a probabilty of a series of winners in a row? Like 3 or 4 winners in a row, with a basic 80% winning strategy for example??

1 = 80 %
2 = 0.8 ^2 = 64%
3 = 0.8 ^3 = 51.2%
4 = 0.8 ^4 = 40.96%

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geott
 1 = 80 % 2 = 0.8 ^2 = 64% 3 = 0.8 ^3 = 51.2% 4 = 0.8 ^4 = 40.96%

But only if the single trades are completely uncorrelated. In which case the approach of skipping a trade would not work as the chance that the next trade will be a winner would always be 80% regardless of the outcome of previous trades.
However, if the trades were correlated in some way or another, which they probably arent (to any significant degree) the approach could work (or perhaps the opposite approach).
The only way to find out is to keep extensive trade records, kind of like train spotting, only more compulsive

Vvhg

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Posts: 2,302 since Feb 2010

 Hi everyone, I have a question concerning a trading rule, which I have come across from 2 different Gurus. The one explained it directly the other had it somehow hidden in his rules. Here it is in my words: Letīs assume we have a trading strategy that is basically 80% winning, but the outcome is more or less breakeven. So the 20% loosers eat up all the winners. Now the rule is to stop trading when 3 winners came in a row. Because - they say - after 3 winners in a row the probability of encountering a looser gets too high. Now you either stop trading for the day, or at least till the next looser passed by untaken. Is this a valid approach to skip the low probability loosers, and transform a breakeven strategy to a winning strategy? As far as I understand statistics it is not possible to know, where the winners ( or loosers) come in. But is it possible to have a probabilty of a series of winners in a row? Like 3 or 4 winners in a row, with a basic 80% winning strategy for example??

There are just too many unknown variables that can affect the outcome...

If a system is a trend following system , the trading day is a strong trending day ... and the market is in sync with your system ... you can have all winning trades ... unfortunately, you will hate yourself because you stopped trading after the first three winning trades

The same system on a very choppy or range bound day could produce all losers ... unfortunately you will hate yourself for continuing to take trades waiting for the 80% wins to kick in

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Last edited by ThatManFromTexas; May 20th, 2012 at 12:48 AM. Reason: Piss Poor Typing
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geott
 1 = 80 % 2 = 0.8 ^2 = 64% 3 = 0.8 ^3 = 51.2% 4 = 0.8 ^4 = 40.96%

Thanks for all the answers so far.

Geott : I was looking for just this numbers!

But I did not get completely what VVHG said.

Do the trades have to be uncorrelated or correlated for this "series probabilities" to work?

In which case would I fall for the "gamblers fallacy"?

Is this right?:

Correlated:
1 = 80 %
2 = 0.8 ^2 = 64%
3 = 0.8 ^3 = 51.2%
4 = 0.8 ^4 = 40.96%

and

Uncorrelated:
1= 80%
2=80%
3=80%
4=80%

or the other way round ?

Elite Member
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Platform: NT
Favorite Futures: FDAX, CL

Posts: 1,583 since Mar 2011

 Thanks for all the answers so far. Geott : I was looking for just this numbers! But I did not get completely what VVHG said. Do the trades have to be uncorrelated or correlated for this "series probabilities" to work? In which case would I fall for the "gamblers fallacy"? Is this right?: Correlated: 1 = 80 % 2 = 0.8 ^2 = 64% 3 = 0.8 ^3 = 51.2% 4 = 0.8 ^4 = 40.96% and Uncorrelated: 1= 80% 2=80% 3=80% 4=80% or the other way round ?

It is connected to the gamblers fallacy. Talking about uncorrelated trades the chance is always 80% (in this example) for each INDIVIDUAL trade seen as a single, uncorrelated event (which it is). The chance for four winners in a row would be 4 = 0.8 ^4 = 40.96%. BUT the fourth trade of this series (regardless of the outcome of the previous 3) always has a 80% chance.
So if you skip trades in a system where the trades are uncorrelated or insignificantly correlated, you gain nothing, other than experiencing the gamblers fallacy first hand

vvhg

 Hic Rhodos, hic salta.

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