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Trading Systems – Understanding Winning Percentage
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Let’s say you developed our purchased a trading system with a”winning percentage of 70%”.
What exactly does that mean?
It means that the probability of having a winning trade is 70%,i.e. it is more likely that the trade you are currently in turnsout to be a winner than a loser.
Does that mean that when you trade 10 times you will have 7winners? – No!
It means that if you trade long enough (i.e. at least 40 trades)then you will have more winners than losers, but it does notguarantee that after 3 losers in a row you will have a winner.
Let me give you an example: If you toss a coin then you have 2possible outcomes: head or tail. Probabilities are 50%, i.e.when you toss the coin 4x then you should get 2x head and 2xtail.
But what if you tossed the coin 3 times and you got 3 times”head”? What are the probabilities of “head” on the next cointoss? 50% or less?
If you answered “less” than you fell for a common misconception.The probabilities of getting another “head” is still 50%. Nomore and no less. But many traders think that the probabilitiesof “tail” are higher now because the three previous coin tossesresulted in “head”. Some traders might even increase their betbecause they are convinced that now “tail is overdue”.Statistically this assumption is nonsense and a dangerous andmany times costly misconception.
Let’s get back to our trading example: If you have a winningpercentage of 70% and you had 9 losers in a row, what are theprobabilities of having a winner now? – It’s still 70% (andtherefore there’s still a 30% chance of a loser).
It’s important that you understand this concept!
About the author:
Markus Heitkoetter is a 15 year veteran of the markets.
For more free articles and a free eBook “How to make moneywith trading systems” visit visit http://www.rockwelltrading.com and http://www.free-trading-info.com
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