How many consecutive losing trades would make you pause trading? - page 2

[Minh Tue Le]

Events of 2 and 3 losses are different. The event of 2 losses is a sign of warning and trading could continue. The event of 3 losses is a sign of error and it makes us thinking of pausing trading.

[Ryan L Johnson]

Minh Tue Le #:
Events of 2 and 3 losses are different. The event of 2 losses is a sign of warning and trading could continue. The event of 3 losses is a sign of error and it makes us thinking of pausing trading.

While that may be true for your particular trading strategy, that is not a case of one size fits all. As has been said repeatedly in this Forum, each trader must collect consecutive losses statistics from testing her/his particular strategy and then let that determine the count of average losses + 1.

[Minh Tue Le]

Ryan L Johnson #:
... let that determine the count of average losses + 1

The problem lies in Average Losses + 1. This is the biggest weakness of the analysis. Let's say a strategy has 1,000 trades and the statistics show:

- Average consecutive losses = 3.

- Maximum consecutive losses = 9.

According to the formula above, the trader will pause the strategy when 4 consecutive losses occur. But this can lead to two problems:

First: Stopping the trade too early.

Four consecutive losses can be perfectly normal for that strategy. Pausing at this point could cause the trader to miss subsequent recovery trades.

Second: Average doesn't reflect the probability of an abnormal losing streak.

Average is an average value, not a probability threshold or a statistical anomaly threshold. A strategy with an average losing streak of 3 doesn't mean the 4th streak is abnormal.