ers in a row, given a certain amount of trades. Note that we always need two trades
or more for the total number of trades to be able to calculate an exact amount of
winners and losers in a row.
For example, to calculate the likelihood to experience exactly two losers in a
row, we need one winner to begin the sequence, then the two losers, and finally
one more winner to put an end to the losing streak. This makes the trading
sequence look like: (Win, Loss, Loss, Win). With a total of four trades, only one
of the 16 possible sequences can look like this, which makes the likelihood for that
particular sequence to happen equal to 6.25 percent (1 / 16). (See cell C7 in Figure
3.4.) With a total of five trades, four sequences are possible having two losers in a
row, either (Win, Loss, Loss, Win, Win or Loss) or (Win or Loss, Win, Loss, Loss,
Win), which makes the likelihood for any of them to come true equal to 12.5 per-
cent (4 / 32). (See cell D8 in Figure 3.4.)
Using the data in the matrix, you also can produce a chart like that in Figure
3.5, which shows the same thing in a graphic way. Here, we can see that the like-
lihood of experiencing as many as 15 losing trades in a row is very small for a total
number of trades ranging from 50 to 100. Now, that is not to say that it can’t hap-
pen, but the likelihood for it is very small. If you already have experienced such a
losing streak, either for real or during back testing, the likelihood for it to happen
again within a 100-trade trading sequence is minuscule.
In fact, exactly how large the chance is, is depicted in Figure 3.6, which
shows the likelihood for a few different trading scenarios, given a trading sequence
of 100 trades. The line in the middle shows the likelihood to experience exactly a
certain number of winners or losers in a row. The rightmost line shows the likeli-CHAPTER 3 Probability and Percent of Profitable Trades 41
FIGURE 3.4
Matrix indicating likelihood of winners and losers.