There are a number of reasons that knowing the longest likely losing run can be important. The most important is that knowing this helps you decide what size of bank you need for the system. It’s no good using a 10 point bank for a system that you expect to hit occasional runs of ten or more losers.
Another reason is for your own psychological well being.
With any system there will be times where you hit a losing run and you have to make that decision whether to continue with the system or whether to reject it as no longer profitable. The earlier in the life of the system that these losing spells come, the harder the decision will be, and the more likely it is that you will let a good system go.
To determine the longest losing run we can look through the past results and see what has happened before, and this will give us some indication. But a better way would be to use some math.
There is a relatively simple formula which will calculate the longest expected losing run of a system based on the strike rate of the system taking into account the amount of data you have.
This calculation can be made on a scientific calculator which has the Natural Logs (LN) function. Or if you still have your Logarithm tables from school you can use those (do they still use Log tables at school?) or you can type the formula into a cell of an excel spreadsheet.
Don’t be overwhelmed by the look of a formula. It is very straightforward and on the next page I’ll show you exactly what to type into excel to have it calculate the answer for you.
The formula is…
LN(1/Number of bets)/LN(Losing Probability/100)
So let’s say I have created a system that I have tested on a number of races and have come up with 500 selections, this would be my number of bets.
My losing probability will be the strike rate of the system taken from 100. So if the strike rate was 42% then the losing probability is 100 – 42 = 58.
This makes my calculation
Which = LN(0.002)/LN(.58)
Which = 11.4
To calculate this in an excel spreadsheet I would just enter the following into any cell.
The result of this equation will be the figure that represents the longest likely losing run. Always round this up, and please note that losing runs can go on longer – though in this example it is highly unlikely and considerably less than a 1% chance.
Another thing to keep in mind is that it is not the longest losing run that is so dangerous. The more dangerous occurrence is the ‘bad patch’.
This is where you have a few losing runs close together with very few winners in between. It is generally accepted that if you double your longest likely losing run, then that will cover your bad patches comfortably.
This means that in our example here (that of 500 bets and a losing probability of 58%) we have a longest likely losing run of 12, which we would double to 24.
So, this tells us that in order to cover against bad patches we should allow for a losing run of 24 bets.
If we were betting a percentage of our bank on these selections we should feel safe using 4% of our bank (100/24). I have rounded this number (4%) down just to add more safety to the situation and to protect our bank as much as possible.
We are all tempted, on occasion, to go for maximum profit in minimum time and think that the worst won’t happen to us. But if we follow the guidelines set out above we should be safe and protected from a total loss situation.