If you've traded for any length of time at all, then at some point you've probably had a long series of losses.

If you haven't experienced something like that yet: you will. There are a couple of reasons why this happens—

• A Law of Large Numbers statistical probability event.
• Your trading methodology is incorrect.

In mathematics, the Law of Large Numbers states:

Law of Large Numbers

In probability theory, the law of large numbers (LLN) is a theorem that describes the result of performing the same experiment a large number of times.

According to the law, the average of the results obtained from a large number of trials should be close to the expected value and tends to become closer to the expected value as more trials are performed.
--- Dekking, Michel (2005). 'A Modern Introduction to Probability and Statistics'. Springer. pp. 181–190. ISBN 9781852338961.

What all that means is: if you do something enough times, the likelihood of some 'random' event occurring becomes not so random.

The key phrase here is: "enough times". That's the Law of Large Numbers. You have to do something many, many, many times before you can apply statistical analysis to the events.

Of note is that to this post, I have a companion video of the same title: How Do You Deal With 6 Losing Trades In A Row? that puts all of this together from a different view point.

If you've come from watching that video, then press on here. However, if this is your starting point, I might suggest that you read through this before watching the video. Or, if you want, you can skip to the bottom of this post to watch that video now.

So, how many trades would you have to make in order to have a statistically large enough sample size of data to calculate various metrics, like your Win To Loss Ratio, for example?

If you're relatively new to trading ‐ under a few hundred trades ‐ then you need to keep trading until you have fairly consistent profitable results ‐ probably 200 to 300 trades to get there. Once you are consistent, then you could probably use the next hundred trades to calculate your metrics as 100 is a good sample size to go by.

But that raises an interesting problem: if you're a long term swing or position trader, you may only trade 50 times a year.... It's going to take a long, long time to accumulate a large enough sample size of trades to calculate any significant metrics over your trading.

Well, why do you even need these metrics, anyway?

If you're trading fine, and are at the point that you are profitably trading consistently, then what are the metrics going to tell you that you don't already know?

Well, let's go back to the initial premise of this discussion: "How Do You Deal With 6 Losing Trades In A Row?"

As I mentioned: those 6 (or whatever) losing trades in a row could be the result of 2 things:

• A Law of Large Numbers statistical probability event.
• Your trading methodology is incorrect.

Wouldn't you want to know the difference? Wouldn't you want to know if you're just in a situation that should clear itself via the Law of Large Numbers as opposed to realizing that your underlying trading methodology is incorrect?

According to the Law of Large Numbers in statistical analysis: if you can lose 6 times in a row, then, guess what? You can also win 6 times in a row.

If you're trading consistently and have solid metrics, then you can calculate exactly what your needed Win To Loss Ratio should be in order to overcome that string of draw downs.

For example, let's say your average win is $100 and you're average loss is $100. You'd need a 2 out of 3 win rate: 66.7% to over come that (2 wins of $100 is $200, and 1 loss of $100 gives you a trading profit of $100 over 3 trades.

But is that a 'good' metric?

Let's say you're trading a $10,000 account at $10 per pip. Thus, to make/lose that $100 is a 10 pip move, right?

But, it took you 3 trades to make that $100. That's a per trade expectation value of $33 per trade (3.3 pips on a $10,000 account at $10 per pip).

Yeah, soooooo?

Well, your 'risk' is the $10,000 bank you needed to make the trade, so $33/$10,000 is a per trade expectation per cent on risk of .33%.

And that means that - statistically - if you trade 100 times a year you'll make $33 x 100 = $3,300 a year against that $10,000 bank simple return (not compounding). And that is a 33.3% return against that constant $10,000 risk.

Great. So, what happens then if within those 100 trades you lose 6 times in a row, but don't have a corresponding 6 wins to compensate for that?

So, you'd have 6 losses of $100 or $600 balanced against a $33 gain per trade on average over the next 94 trades: $3,102. That leave you with a net gain over the 100 trades of $2,502, which is a 25% return vs. your 'expected' return of 33.3% - a difference of about 8%.

That huge difference in yearly return on risk is not good trading. What if you are a very active trader and hit another likely statistical event of 12 losses in a row.... Now what?

Let's look at that: you'd have 12 losses of $100 or $1,200 balanced against a $33 gain per trade on average over the next 94 trades: $3,102. That leave you with a net gain over the 100 trades of $1,902, which is a 19% return vs. your 'expected' return of 33.3% - a difference of about 14%.

How do you overcome/fix this? 2 ways:

• Improve your Win To Loss Ratio
• Reduce your per trade risk.

How would you go about "... improve your Win To Loss Ratio?"

That's a tough one, right?

I mean if you're trading along and the results are consistent as I've indicated above, then you may very well be trading the best that you are capable of.

But that doesn't mean you're screwed here. Not by a long shot.

What constitutes that Win To Loss Ratio? It's the number of wins divided by the number of losses, right?

But it sooooo much more powerful than that!

Let's look at a corollary of the Win To Loss Ratio: the Win To Loss Expectation.

In fact, you might find my blog post Importance Of The Win To Loss Ratio Trading FOREX, and its companion video A Different View Of The Win To Loss Ratio interesting as they are both very detailed and focused on the Win To Loss Ratio.)

The below equation is the basic representation of the win to loss ratio of wins divided by losses, i.e. W/L. Note that the ratio is set to equal 1. This simply means that wins equal losses.

(NumberPipsWon * AmountWon)
-----------------------------	= 1
(NumberPipsLost * AmountLost)

Which translates into the following:

(NumberPipsWon * AmountWon) = (NumberPipsLost * AmountLost)
(NumberPipsWon * AmountWon) – (NumberPipsLost * AmountLost) = 0

Instead of wins equaling losses, however, we really want a profit of x dollars won after, say, 10 trades.

It could be 100 trades, or a thousand. Doesn't matter.

I'm using a ten trade sample size not as the trading sample size, but only to create a statistical model based on 10 trades that could easily be transposed into whatever sample size of trades you want to do later. This is the theory part that your later 100 or 1000 trades will need to resolve to.

So, of the 4 listed variables in that equation of:

• NumberPipsWon
• AmountWon
• NumberPipsLost
• AmountLost

which one is it that we should solve the equation for?

Well, there's really only 2 of those variables we need to choose from:

• NumberPipsWon
• NumberPipsLost

The dollar amounts won or lost are not the key; only the pips. The amounts are something you'll plug into the equation per your trading plan goals. That's why they can be eliminated from the equation.

Thus, over the 10 trades in our sample run, we want to make — on average — 3.3 pips per trade so that over the 100 trades we'd need TotalPipsWon to be 330 pips, and the equation is now:

(WinPercent*NumberPipsWon) – (LossPercent*NumberPipsLost) = 3,400

In the example used in this post, our 100 trades over the year resulted in a win rate of 67%, right? Okay, so let's plug all that into the equation—

(66.7*10) – (33.3*10) = 334 (a little more precise than the ball park 330 calculated above)

But here's the problem: Again, you want to increase that value of 334 to account for a potential, and statistically likely run of losing trades.

You can say that 'on average' you win $100, but you can't guarantee that because of those losses. So, really: we have no idea — or control — over what that NumberPipsWon value could be. It could be anything....

The only thing in that equation that we do have control over is the NumberPipsLost. The value we assigned to that was an arbitrary value of 10 pips; but it could be anything....

Let's just be really bold here and make a rule that we're absolutely going to limit the number of pips lost to a static hard quantifiable stop value of 5 pips. What's the equation look like now?

(66.7*10) – (33.3*5) = 500, a surprisingly good result by just changing one small thing that we do have control over.

The moral of the story here in dealing with those statistically likely 6 losing trades in a row is the following:

In order to ensure maximizing your Win To Loss Ratio results, the simple solution is to reduce your per trade risk to some small, static value that even if hit 10 or 12 times in a row will not seriously damage your account.

Now, the level that you put that static stop value, is totally a function of how good your Win To Loss Ratio is because that is a metric of how good your trade entry analysis is.

Perhaps a 5 pip stop is too aggressive for even a day trader. Because I have a pretty good Win To Loss Ratio (when I follow my rules!!!), I do quite well trading the 5 minute chart, for example, with an ATR of 5 pips by setting my stop 8 to 12 pips from entry.

Even if I'm trading the higher time frames where the ATR could be, for example, 100 pips on the daily, I'm not going to set my stop at a similar ratio of 1.6 (8 pips / 5 pip ATR) at 160 pips to, as some folks like to propose: "... to give the price breathing room."

Breathing room? 160 pips of 'breathing room'? Yeah, I don't think so. Not even 80, or 50 pips. Maybe, may-be 20 pips. Maybe...

If I'm wrong on my entry: I want to be O-U-T.... PERIOD!

Even 20 pips is a lot! Take 6 losses on just 1 full lot and that's $1,200 — and I just don't care what the so-called educational material out there statements that it's all just 'proportional'. Bullshit to that!

It's $1,200 on 1 lot; $12,000 on a 10 lot. Think about that....

Video: How Do You Deal With 6 Losing Trades In A Row?