If losing streaks make you think "Is the system broken?", you "still don't understand" probability.
This thread explains the real meaning of a "50% win rate".
↓ Thread 1/5
2/5
Let's assume your strategy's win rate is 50%.
A 50% win rate does not mean "you can win 1 out of every 2 times".
It means "as a result of repeating it hundreds or thousands of times over the long term, the overall win rate converges to about 50%".
However, many people end up thinking:
- Lost 2 times in a row.
- Lost 5 times in a row.
- Therefore, this system is strange.
This is a confusion between short-term results and long-term statistics.
What is necessary in trading is the perspective of understanding "how many repetitions are needed for probability to function".
Many people misunderstand this point, calculating based on the results of a small sample size even when their win rate isn't 50% in the first place, thinking things like, "I won 5 out of 10 times, so the win rate is 50%".
Also, even when they actually know the win rate from a large sample size, they look at the results from a small sample size and think, "I only won 2 out of 10 times, so the win rate is 20%. Something is wrong
3/5
For example, suppose you toss a coin with a 50% win rate 10 times.
It's possible for heads to come up only 3 times, or even 9 times.
This is not because "probability is not functioning," but simply because "the sample size is insufficient".
A 50% win rate is something that "approaches 50% eventually as the sample size increases".
In other words, getting anxious over a few losing streaks simply means you are not enduring "the time required for probability to work".
We have a tendency to fear uncertain things.
In a market where short-term results are heavily influenced by randomness, it is natural to be assailed by fear and anxiety the more you focus on immediate results or small sample sizes.
That is precisely why understanding and preparation are important, and why it is necessary to think big
4/5
Sample size is inseparable when discussing probability.
This is why consistency is inseparable for traders who handle probability.
Many traders pay lip service to "It's important to think in terms of probability," but because they misunderstand or don't really understand probability in the first place, they think small about "the probability of winning the single trade in front of them" based on "the probability derived from the last few experiences," quickly judge that "this method is no good," and repeat endless improvements within a timeframe where probability never works, spinning in circles while misunderstanding that they have "moved forward."
Consistency is crucial for any trial and error related to your trading, for the work of extracting the edge, and for whatever you do
5/5
The reason you get anxious during losing streaks is that you do not understand "probability," a crucial concept for traders.
Losing streaks are also part of probability and are not a bad thing.
The worst thing is that you are only thinking in terms of a small sample size.
Think in terms of a large sample size.
Your consistency is created by the sample size you are looking at.
Thanks for reading!
If you enjoyed this thread, check out my books on trading.
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