Trading Probabilities: The Theory of the Losing Run

Filed under: Learn Forex Trading |

 

Nothing can damage a forex trader’s confidence more than a losing run (also known in the world of gambling as a losing ‘streak’). Knowing a little about probability and how it works can in some small way, help to ease these crises of confidence. Therefore, I would like to take you through a few probabilities and give you a few examples.

 

Since my trades have around a 50% winning percentage (but my 1:2 risk-reward ratio assures profitability), I will take the example of a coin toss, which also has a 50-50 chance of success. This also helps to put the theory into a very easy to visualize example.

 

If you toss the coin two times, and you are calling heads every time you make the toss, you have a 25% chance of hitting two tails. If you toss it four times, you have only a 6.25% chance of hitting four tails. So the more tosses that you make, the more chance you have of it landing on a head (try it!). If you toss it 100 times, you have virtually no chance at all of it not landing on one single head (I say virtually because there is still a minute, although astronomical, chance of this happening).

 

Let’s go back to trading. With a 50% strike rate, over 100 trades, you would have a 4.412% chance of having ten losers in a row. But by the take token, you would also have the same chance of hitting ten winners. However, over a series of 1000 trades, you would have a massive 38.53% chance of hit ten losers (or winners!) in a row. This makes it quite likely to happen. There is also a 1.5% chance of you hitting 15 winners or losers in a row. This makes it quite unlikely to happen.

 

So what can we learn from all of these numbers? That a 50-50 chance of success will only be played out in the long term, and there will be natural peaks and troughs along the way. So don’t get too down after a string of losers. It is all a part of the game.

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