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enough staying power to "flip" their trading methodology enough times to allow the probabilities to come back into their favor. They must also be involved in trades that are "big" enough, profitwise, so that the 3.5 times they lose, they are able to recapitalize their account. The probability that a trader will experience more consecutive winning/losing trades as the frequency of trading increases is covered in more detail in the next section on probabilities. |
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That is what the traders' adage "Let profits run and cut losses short" means. The largest profits are achieved only by staying with a winning trade as long as the continuity of thought persists, and your methodology is still indicating that the trade is valid. Generally only a small handful of trades will generate these large profits; it is absolutely essential that these winners be allowed to play out. That is why it is also essential that losses be cut short when they are still small, and before they turn into monster losses. |
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An interesting thought is that a trader who loses on a great majority of trades, and follows conservative money management rules, will earn more money over a course of several years than a trader who consistently wins on the great majority of trades, and fails to have effective money management rules. |
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Most traders seldom stop to consider the challenges that are encountered when a series of winning or losing trades occurs. Many traders when considering the likelihood of a string of losing trades will think of Murphy's Law: "Anything that can go wrong will go wrong." Often it does seem that losing begets more losing. Ask mathematicians how you can be more objective, and how you can more clearly define or anticipate the probability of a series of consecutive losing or winning trades, and they will respond with a mathematical formula. |
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The first thing that we need to know is the probability of a particular event occurring. For example, we know that by flipping a coin the possibilities are that we will get either heads or tails. In other words, the possibility is 50 percent on one coin flip. In order to determine the probability that we will flip the coin two times and have it come up heads both times, we need to use a formula. |
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The probability of a series of independent events occurring equals the product multiplied by the probability of each event taking place. For example, |
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