I think I can speak for all of us when I say one of the worst times to be a trader is when your on a losing streak.
Losing is one or two trades is usually manageable, but losing 5 or 6 in a row can completely destabilize your trading, today I want to discuss some tips I’ve learned over the years in how you can go about coping with losing streaks.
What Causes Losing Streaks ?
A losing streak always begins with you losing a couple of trades in a quick succession, at this point you’ll probably be unhappy that you have lost money but still confident of the next trade turning out to be a winner.
The next trade you place also turns out to be a loser, now you start to feel the pressure of needing to win, the profits made on your last winning trade are slowly evaporating with every successive losing trade you take.
This is the point where your mindset/attitude will begin to change.
One of the main downfalls of the human mind is its ability to see patterns in otherwise random data.
In most walks of life being able to identify patterns is a help, in trading its a hindrance. A losing streak is viewed by the trader as a pattern, what I mean is if the trader continually loses trade after trade he will begin to think that the next trade will automatically be a loser, he doesn’t know this as fact but he believes this will be the case since he has lost on all of his previous trades.
Unfortunately this can create many problems.
If the trader believes he is going to lose on his next trade he may become hesitate in taking trades that he would usually take, the fear of losing yet another trade will make him only want to take trades which he thinks will work, not necessarily the trades that fit the definition of his trading plan.
This will only cause him more frustration and anger as the majority of the trades he didn’t take ( because he believed they would lose ) end up being winners and the trades he actually ended up taking turn out to be losers.
In most situations where a trader is on a losing streak it eventually comes to the point where the trader manages to take a winning trade, the win fills the trader with a sense of confidence and euphoria, which leads them to believe they can bring themselves out of the losing streak.
The confidence they now feel is what ends up bringing them out of the losing streak, they begin following their trading plan and start to make better decisions in regards to their trading.
Whilst this is what occurs in most losing streak scenarios, for some people the losing streak is never ending, they lose trade after trade after trade. Below I’ve outlined 4 different methods you can use to bring yourself out of a losing streak, these methods are unconventional in the sense that they may not work for everyone but I believe they will work for someone if implemented correctly.
Know How Many Trades You Can Lose In A Row
One really easy way to deal with a losing streak is to know the maximum amount of trades your trading system can potentially lose in a row.
In my “Why You Need To Keep A Trading Journal” article I spend a little bit of time talking about how having a sample size of trades can reveal lots of information about your trading strategy.
One piece of information it can reveal is the maximum amount of trade you can potentially lose in row.
The best way for you to do this is to select one currency you trade, go back to the beginning of the year and note down how many winning trades there were compared to how many losing trades there were, make sure you walk through each trade as if you were taking it there and then, if you usually exit your trades after the market has moved 100 pips in your favor make sure you do the same when analyzing each of these trades.
On the chart above I have marked all the times a pin bar signal appeared in the market.
From the 31st of December 2014 to today, 21 pin bars have formed on the daily chart of EUR/USD
Out of the 21 which appeared, 12 ended up being winners.
The other 9 turned out to be losers.
The maximum amount of trades lost in a row during this period was 3
Had you known this information when you were on losing streak, it would have made the losing streak far easier to deal with.
Instead of being scared that the next trade may turn out to a loser, you will of instead been looking forward to it being a winner, because you know the maximum amount of losing trades you are likely to take a row is only three, anything beyond that means you are getting closer and closer to hitting a winner.
Of course a sample size this small will not give you accurate stats as to how many trades you could potentially lose in a row, its better if you analyze all the pin bars that have formed over the past two or three years, the larger the sample size you get the more accurate the results you will find.
Go Back To Demo Trading
One of the best ways to come out of a losing streak is to return to demo trading.
Going back to demo trading will allow you to regain the loss of confidence you suffer when you are on a losing streak. You can snap out of being in a loss aversion mindset and instead focus on the process of trading rather than the outcome of any individual trades.
This will put you back in the winning mindset needed to recoup the losses you have made whilst being on a losing streak.
When your continually losing trade after trade the mindset of the trader can change, this can be dangerous as when traders lose money they react in different ways.
Some feel angry, others frustrated. For the most part all of these emotions can be handled by traders, but for some it causes them to do stupid things. Trying to make back what you have lost by increasing the leverage your using is a typical reaction of someone who is on a losing streak, voiding the rules you have laid out in your trading plan in another very common reaction.
If your one of these people who have a tendency to begin doing stupid things when your on a losing streak then its best for you to determine a time when you stop trading live markets and begin demo trading in order to avoid making any costly mistakes.
Trade Markets With Lower Volatility
Another method you can use to get out of a losing streak is trading markets with a lower volatility.
You may have noticed some currencies move further than others. The minor forex currencies typically will move a larger distance than the major currencies, this is down to the amount of liquidity present in these markets. EUR/USD – USD/JPY – AUD/USD – GBP/USD all of these currencies are traded by a huge amount of traders, its easy for a trader to buy or sell a large quantity of these currencies due to the amount of people participating in these markets.
The minor currencies do not have the same level of participation, meaning its much more difficult for traders to buy or sell currencies in the quantity they would like.
Usually lower volatility markets are one in which alot of people trade, the four currencies list above are considered lower volatility markets when compared with the minor currencies as the distance they move each day is far smaller than what the minor currencies will move in the same amount of time.
There does happen to be a couple of markets which have a very low level of volatility and are also unrelated to the main currencies which get traded everyday.
Switching to markets which have a lower volatility allows you to continue trading, only with the ability to risk less (as the stop distance will be much smaller) and make less, although this may sound like a negative thing it’s really not as you can build you account back up to respectable levels without being at risk of losing much money.
EUR/CHF use to be good currency for this, for a long time it had a very low volatility rating, unfortunately after the crash last year, the volatility has increased significantly.
Silver is another market which has a low volatility, this is the market is personally use in the event that I’m on a losing streak.
The main purpose of trading lower volatility markets isn’t to necessarily make all of your money back, its to regain the winning mindset needed to make consistent profits from the markets, once you get back into the routine of winning it will be easy for to make back what you have lost when you were losing.
Decrease The Amount Of Leverage Your Using
Sometimes the best way to snap out of a losing streak is to lower the amount of leverage you are using on each trade.
The lower the amount of money you risk on each trade the less your going to care about winning or losing which will put you in the carefree mindset Market Douglas talks about in Trading In The Zone.
This can be hard to implement for traders who only have small accounts, for a trader whose account is under £1000 its going to be very difficult to trade at a lower leverage as their probably already trading at the lowest leverage available to them.
Your supposed to risk 1% of your account on each trade, if you only have £1000 in your account then that means your risking a maximum of £10 on each trade, while its entirely possible to find trades in which you only have risk £10 its almost impossible to find trades where you only have to risk a maximum of £5-£6 per trade.
Essentially losing streaks come back to the point that Mark Douglas tries to make in Trading In The Zone.
In order to trade profitably you must enter a carefree state of mind, this means accepting that anything can happen in the market at any time, if anything can happen there is nothing to be scared or worried about ?
Its impossible for you to know when a losing streak is going to begin or when its going to end, the only thing you can do is prepare yourself for what YOU are going to do when it does eventually occur.