ily vary between a profit of $100,000 and a loss of $50,000. Most likely, however,
you will end up somewhere in the interval plus/minus one standard deviation away
from the mean, which should hold approximately 68 percent of all outcomes. But
what happens if one trading sequence ends up with a loss of close to $50,000? Is
that an indication that the loss will be $100,000 after two trading sequences?
No, it is not. It can happen, but it is unlikely that we will lose as much a sec-
ond time. To understand why this is, we need to remember that two trading
sequences of 20 trades each also equal one trading sequence of forty trades, and
that the more trades in a sequence, the closer its average profit per trade will be to
the true average profit for the system over an infinite number of trades. Of course,
there are no guarantees and a system can simply cease to work at any time, but as
long as the system delivers results within its statistical confines, no such conclu-
sions can be made.
Figure 22.5 shows one trading sequence that shows a loss of close to $75,000
after about 40 trades. However, even this initially really bad sequence eventually
turned around to end up with a final profit very close to the estimated average.
Note that if you start to trade this system today, you can expect to make approxi-
mately $175,000 over 200 trades. But if after 200 trades your net profit is only278 PART 3 Stops, Filters, and Exits
FIGURE 22.4
Equity variation over the randomly picked trades.