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Wanna share something about a topic that is rarely discussed in trading world - 'sequence prediction'
Knowingly or unknowingly, many traders try to predict their trade sequences. This is a prevalent issue among traders of all kinds of experience
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Wanna share something about a topic that is rarely discussed in trading world - 'sequence prediction'
Knowingly or unknowingly, many traders try to predict their trade sequences. This is a prevalent issue among traders of all kinds of experience
(1/7)
If 5 trades are winners in a row, then they expect the sixth trade to be a loser and would not pull the trigger or would reduce the size drastically expecting a losing trade.
The worst part is when we reverse the situation..
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The worst part is when we reverse the situation..
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If 5 trades are losers in a row, then they increase their size for the 6th trade expecting a winner. But, market gives another losing trade. Now, they are in deep hole (both mentally and financially)
They stop doing it for a while but it creeps in again.
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They stop doing it for a while but it creeps in again.
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It is often easy to come out of financial ruin but if we drain our mental capital, it will create chaos.
Sequencing assumption can be very fatal in trading !! Most of us dont talk about it but this bias is very real.
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Sequencing assumption can be very fatal in trading !! Most of us dont talk about it but this bias is very real.
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In one of the futuresmag article (shared in the last tweet of this thread), the author nicely explains this - "Over time, it is a virtual certainty that at some point all traders will suffer a long series of losing trades"
Many of us think that it would never happen to us (5/7)
Many of us think that it would never happen to us (5/7)
But over a period of 1000/10k trades, it will happen. There is no guarantee in trading but this is a done deal !!
So, preparing for the worst case scenario would save us from the 'rare' event of hitting the worst case scenario.
Pls see the attached pic
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So, preparing for the worst case scenario would save us from the 'rare' event of hitting the worst case scenario.
Pls see the attached pic
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Pls make sure your money mgmt plan takes care of 'number of losers in a row' from the winrate you get in your extensive backtesting.
It is also a futile attempt to predict the seq of trades
Futures magazine article --
http://www.futuresmag.com/2011/12/31/simple-money-management-wins-over-time?page=1
Happy trading all !!
(7/7)
It is also a futile attempt to predict the seq of trades
Futures magazine article --
http://www.futuresmag.com/2011/12/31/simple-money-management-wins-over-time?page=1
Happy trading all !!
(7/7)
