Losing streaks
How long streaks get at your win rate, before they happen. · 6 min
Decide first
Losing streaks are longer than intuition suggests, because there are many places in a long run where one can start. The chance that one particular run of k trades is all losses is simple, q^k with q the loss rate. The chance of such a streak somewhere in n trades is much larger, and the app computes it exactly.
With a 60% loss rate, a given run of ten trades is all losses with probability 0.6¹⁰ ≈ 0.6%. Over a thousand trades, a streak of ten or more happens 91% of the time: likely at least once. Knowing that number before the streak comes is what lets you keep following the plan when it does.
Losing streaks to expect
Expected longest losing streak in 100 trades: 7.9
| Streak of at least | Chance in 100 trades | Cost at 1% | Cost at 2% |
|---|---|---|---|
| 3 losses | >99.9% | 3.0% | 5.9% |
| 4 losses | >99.9% | 3.9% | 7.8% |
| 5 losses | 97.6% | 4.9% | 9.6% |
| 6 losses | 87.3% | 5.9% | 11.4% |
| 8 losses | 49.0% | 7.7% | 14.9% |
| 10 losses | 20.5% | 9.6% | 18.3% |
| 12 losses | 7.7% | 11.4% | 21.5% |
| 15 losses | 1.6% | 14.0% | 26.1% |
Worked example: planning for the streak
- Win rate 40%, 200 trades a year.
- Expected longest losing streak: 9.2 losses.
- Chance of 10 or more somewhere in the year: 38%.
- At 1% risk a 10-loss streak costs 9.6%; at 2%, 18.3%.
- Choose the risk per trade so that streak is a number you can live with.
Common mistake: reading a streak as a broken system
After six losses the urge is to change the rules. But at a 40% win rate, six in a row is expected. Changing a system because of a streak it was always going to have replaces a measured edge with an unmeasured one. Decide in advance how long a streak would have to be before you review the method, and make that number longer than the expected longest streak.
Check yourself
- Win rate 40%. What is the chance that the next 4 trades are all losses?
- A streak of 12 losses at 2% risk per trade (fixed fractional). How much of the account does it cost?
- Win rate 60%. Roughly how long is the longest losing streak you should expect in 500 trades?
Closing round
Play a round and keep a streak count. After it, look up your longest losing streak in the table above at your round's win rate: was it unusual?
Play the round in the simulator →The simulator's markets are generated, not real prices; the round practises the arithmetic, it does not predict anything.
Further reading: Tharp, Trade Your Way to Financial Freedom. The lesson teaches the idea in its own words and exercises.