One of my top five books is Van Tharp's Definitive Guide to Position Sizing. 380 pages on the subject of Position Sizing. The purpose of position sizing is to meet your objectives, as he states on the first page of the preface.

Dr Tharp has an interesting section on the effect of streaks on the psychology of the trader. When a long streak occurs you tend to readjust the odds of your system in your head and risk appropriately. So, during a losing streak traders tend to assume that the system is no good or the market has changed, and risk less. And during a winning streak they think their system is the Holy Grail, and risk more.

The reality is, streaks occur randomly and the trader should recognise this.

The figures are actually startling if you havent seen them before.

Lets take the example of a system which wins 50% of the time, and lets look at the probability of various losing streaks.

It is virtually certain that you will get 5 losers in a row at some point. There is roughly a 10% chance that you will get 9 losers in a row and roughly a 1% chance that you will get 12 losers in a row.

Let now say you have a system which wins 70% of the time.

It is virtually certain that you will get 3 losers in a row at some point. There is roughly a 10% chance that you will get 5 or 6 losers in a row and roughly a 1% chance that you will get 7 or 8 losers in a row.

If you are suprised by the figures and not sure whether you have the right psychology to cope with the probabilities get Van Tharp's book!