Here is an exact copy of the chart.
-------------------------------------------------
Losing is part of the game
An offshoot of this lower winning percentage, and something that often comes as a surprise to many traders, is the experience of coping with an extended losing streak. The ultimate goal of achieving profitability will remain out of reach unless great care is taken to control the amount of capital allocated to each position, as even wildly successful traders are not immune to a string of losing positions. In short, the objective in options trading is to "stay in the game" through proper money management techniques that allow you to weather the inevitable storms of losing trades.
To shed some mathematical light on the importance of proper money management, our Quantitative Analysis group created the following table that displays the likelihood of experiencing losing streaks of various lengths based on a range of win rates.
The figures in this table are based on a 50-trade period, or roughly what you would receive over a two-year subscription to most of our premium services. The "Win Percentage" column encompasses a wide range of potential win rates, from five to 95 percent. The table shows the probabilities of seeing anywhere from two to 11 consecutive losing trades during the 50-trade cycle, based on the corresponding percentage win rate.
For example, for a 30-percent win rate, the probability of experiencing five straight losing trades at some point during a 50-trade cycle is essentially 100 percent. An extremely successful options service is one that has a 40-percent win rate. Such a service still runs a 97.6-percent chance of having a string of five consecutive losing positions. Also note that a strong winning percentage of 40 percent will stand a better-than-50/50 chance of seeing eight consecutive losses over a 50-trade period.
Thus, given the high probability (and in some cases, certainty) of losing streaks within a given period, it is critical to realize that investors who place too much capital into successive recommendations run the risk of decimating their trading account during a perfectly normal trading cycle. In other words, they will be unable to stay in the game. Those that are able to stay in the game and reap the rewards of the hot streaks and higher returns of winning trades stand a better chance of ultimate profitability over the longer haul.
For example, one of our services had a track record that illustrates that 1) losing streaks will occur and are virtually inevitable, and 2) it is possible with proper capital allocations to not only overcome these losses but to achieve profitability. This particular service was very active in 1999, logging 47 trades over the year. The profit statistics closely followed the overall series numbers: the winning percentage was 32 percent (15 winners), the average win and loss returns were 97 and minus 34 percent, respectively, and the portfolio return was 50 percent for the year. The most interesting number, however, is that this service experienced 10 losing trades in a row, yet still managed to profit handsomely.
We should point out that such a losing streak is not an unusual event. In fact, the likelihood of a 10-loss string with a 32-percent win rate is 58 percent. The moral of the story is that even though low winning percentages and long losing streaks are part of the options buying game, profitability is achievable if you let winners run and cut losses short (that's our job), while staying in the game by using proper money management principles (that's your job).
Read the rest here.
