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For a trading system that trades only one security we can easily compute the longest expected losing streak using this formula:

abs(ln(n) / ln(P))

where: n is the number of trades, ln is natural logarithm, P is the probability of a losing trade and |..| is the absolute value.

If we simultaneously trade the same system on a portfolio of securities, let's say all the members of an index like the OEX or the SPX, this formula greatly underestimates the longest expected losing streak.

What is the best way to fix it?

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  • $\begingroup$ Hi: maybe someone could help if you explained in more details how that formula is derived. AFAIK, it's a not a well known formula. $\endgroup$ – mark leeds Apr 11 at 17:01

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