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Trading Systems - Understanding Winning Percentage
from: Markus HeitkoetterLet'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 turns
out to be a winner than a loser.
Does that mean that when you trade 10 times you will have 7
winners? - 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 not
guarantee 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 2
possible outcomes: head or tail. Probabilities are 50%, i.e.
when you toss the coin 4x then you should get 2x head and 2x
tail.
But what if you tossed the coin 3 times and you got 3 times
"head"? What are the probabilities of "head" on the next coin
toss? 50% or less?
If you answered "less" than you fell for a common misconception.
The probabilities of getting another "head" is still 50%. No
more and no less. But many traders think that the probabilities
of "tail" are higher now because the three previous coin tosses
resulted in "head". Some traders might even increase their bet
because they are convinced that now "tail is overdue".
Statistically this assumption is nonsense and a dangerous and
many times costly misconception.
Let's get back to our trading example: If you have a winning
percentage of 70% and you had 9 losers in a row, what are the
probabilities of having a winner now? - It's still 70% (and
therefore 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 money
with trading systems" visit visit
com and
nfo.com
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