Mar 152013


You will notice throughout this website I talk about losing streaks much more than winning streaks – but they both occur – so why emphasize the losing streaks? Well the common sense answer is that a string of losses can destroy your trading capital and your trading career.  I also emphasize losses because that’s when you will think of quitting your system and go back on your search for the holy grail – or quit trading all together. Frankly both a long streak of winning trades and a long streak of losing trades will mess with your head – and both are dangerous.

How Can a Streak of Winning Trades Possibly Be Bad?

I'm a Money MagnetWhen you experience a long win streak you will begin to believe that you or the system you are using are better than you thought. You will want to raise your risk since you’re always winning (look at all the money I could have made if I just would have traded a little larger). You may decide to tweak the trading system since you are so good and you will take a trade even when the system said not to.  EVEN WORSE – if that trade you weren’t supposed to take actually makes money – you will now believe you can trade an untested system – because you’ve just improved it. You can guess what happens next! But you believe you are that good because – LOOK – you’ve had 10, 12, 14, 16 or ?? winning trades in a row! Guess what happens to your thought process the first time your new “untested” system hits its first string of losses?  Now you’ve abandoned your original trading system and you’ve abandoned your “tweaked system” too.  How’s your confidence in trading doing after that?

Having Confidence in Your Trading System

A trader without confidence is not a trader at all.  Traders buy something with the intention of selling it later at a higher price.  Traders sell something, planning to buy it back later at a lower price.  That is trading in a nutshell and if your a trader, those are your plans.  But without the Big C, you will alter your plans at the first sign of trouble instead of holding until your system tells you it’s time to exit.  Why? Because you with “Doubt”.

Let’s Talk About Losses and Trading

Trading in any market is tough mentally.  Losses are a part of trading – they are a cost, just like paying your rent.  They are the “Ticket Price” for the profitable trades hidden behind door number two.  Most successful traders have more losing trades than winning trades.  The size of their losses are smaller than the size of their gains, but there are generally more losses in most trading systems.  You MUST MUST MUST be mentally prepared to handle a string of losses.  In good times and bad, you must constantly remind yourself of the merits of the trading system you use. Why? Because by doing so you build up your mental toughness for when you need it – for that unexpected string of losses.

A Good Attitude To Have Toward Trading Losses And Trading

Pull The Cord Until It Starts
Imagine trying to start an old pull lawnmower. Now this lawnmower has seen its better days, so it takes several pulls to get this old fella started, but once it’s running it really purrs and will keep running for a very long time. However, you don’t want to shut it off or you have to start all over – it will take several pulls to get it started again.  Losses are like the pulls to get the mower started.  You enter the market, get stopped out – enter the market, get stopped out – enter the market, market goes in the right direction and you’re off and running.  You’re just trying to get to the point where you can stay in your position.  And once your in – you want to stay in, because who wants to try to start that old mower again if you don’t have to.


How Many Losses In A Row Would It Take To Break Your Confidence?

What would actually be going through your head if you had 16 losing trades in a row?  I can tell you from personal experience, once you get past 3 or 4 losing trades in a row, you begin to feel it psychologically.  Now imagine 16? (Hint – Think small losses)

Without the right mental attitude, rehearsal and preparation, a string of losses will cause doubt and depression.  You won’t even want to trade because you know what will happen – you’ll lose again.  During a losing streak, there’s two things you have to worry about, Your Head and Your Account.  Preparation will help with Your Head. The only thing that can save Your Account (and your trading future) will be your use of Position Sizing (see The Most Important Element In Successful Trading).

How Do You Keep The Right Mental Attitude During A Losing Streak?

There are books written on this subject and you will need to find what works for you, but here are a couple of things that should help.  Keep things simple, don’t trade with multiple systems at the same time.  Make sure you consistently follow the rules for your trading system – no improvising.  Review the ground rules for your system.  Don’t ever try to prove you are right, always exit a trade when you are supposed to – period. Remind yourself that losses are a cost of the business. Remind yourself of the lawnmower analogy. If your system has a long enough track record, review some profitable periods, remind yourself that your system works. If you have a profitable trade, DON’T EXIT IT EARLY just to take a profit – early exits normally backfire on you.

Are you detecting a theme? Stick with your trading system, follow all the rules.  It also helps to develop a “Healthy Fear of Missing Out” – missing the next big trade that will be signaled by your trading system.

One More Thing – Not All Trades Count Toward Your Streaks

If you bought before a “Buy” was actually signaled;  If you sold before your sell signal actually went off;  If you held onto a trade after a “Sell” had been signaled; If you added a different condition to your system; If you took too large of a trade; etc, etc,etc… Any improvising at all — THEN —  None of these trades count in the statistics for your trading system.  Any divergence at all from your trading systems rules is considered an “Impulse Trade” and records should be kept separate.  In addition, since you actually “Didn’t Take A Trade” using your system, you need to simulate the results of the real trade and add it to your trading stats.

Bottom Line – Be Mentally Prepared For Trading Streaks

Trading streaks will happen, if you are not prepared, they could easily end your trading career. These 3 basic steps should help you prepare for the inevitable – 1)  Always follow your trading rules 2) Remind yourself of the merits of your trading system constantly and 3) alway use Position Sizing.

You Like? Please share! Questions? Put them in the comments below so everyone can learn. Thanks, Gene

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