probabilities of such a run; in other words, the odds of flipping a givennumber of heads or tails in a row.
1 50%2 25%3 12.5%4 6.25%5 3.125%6 1.5625%Here is where we run into problems. Let's say we have just made fiveprofitable trades in a row. According to our table, which is giving us theprobability of being right (or wrong) five times in a row based on a 50%chance, we have already overcome some serious odds. The odds ofgetting the sixth profitable trade looks extremely remote, but actually thatis not the case. Our odds of success are still 50%! People losethousands of dollars in themarkets(and in casinos) by failing to realizethis. The reason is that the odds from our table are based on uncertainfuture events and the likelihood they will occur. Once we have completed arun of five successful trades, those trades are no longer uncertain. Ournext trade starts a new potential run, and after the results are in for eachtrade, we start back at the top the table,
. This means everytrade has a 50% of working out. (Learn how to illustrate an asset return'ssensitivity read
Find The Right Fit With Probability Distributions
.)The reason this is so important is that often, when traders get into themarket, they mistake a string of profits or losses as either skill or lack ofskill. This is simply not true. Whether a short-term trader makes multiple