Overcoming a Losing Streak «

Overcoming a Losing Streak


Losing streaks are an unavoidable part of trading, and they apply to all styles of trading (day, swing, or position trading), and all trading personalities.

How a trader responds to, and manages a losing streak, is one of the things that separates professional traders from amateur traders. Professional traders will have a clearly defined plan that they execute calmly, whereas an amateur trader will most likely panic, and either stop trading completely, or start taking trades that should be avoided (both of which have the same end result).

The two main criteria to consider about losing streaks are the acceptable length of the losing streak, and how to overcome the losing streak.

Length of Losing Streak
The maximum length of an acceptable losing streak will depend upon the trading system being used. For example, a trading system that has a profit target of 20 ticks and a stop loss of 10 ticks might be able to withstand a short term losing streak of a few days, but a trading system that has a profit target of 100 ticks and a stop loss of 20 ticks might be able to absorb a losing streak lasting two or three weeks.

When you are testing your trading system, keep track of any length of time that it was not profitable in the short term (e.g. one day, one week, etc.), while still being profitable in the long term (e.g. monthly). The average length of these short term losing streaks is a good choice to start with for the maximum acceptable length of a losing streak, because it will ignore the shorter losing streaks without allowing any long term losing streak to impact your profitability.

Managing a Losing Streak
Once you have determined the maximum acceptable length of a losing streak, you can easily determine when a losing streak needs your attention. Any losing streak that reaches the maximum acceptable length needs to be managed so that it does not affect your profit.

There are several reasons why a trading system may experience a losing streak that reaches the maximum acceptable length. It could just be a longer than normal losing streak, or it could be that that trading system no longer fits the market conditions, and needs adjusting in order to continue to be profitable.

A losing streak is managed by reviewing your trading system as you did when you were first testing it. This includes trying different timeframes, different indicator lengths, and perhaps alternative markets. For example, if you have noticed that you are exiting your trades right before the market moves in your direction, lengthening the indicator timeframe might correct this by allowing you to remain in your trade slightly longer.

When you have fully reviewed your trading system, you will be able to determine if this is just a temporary losing streak, or if this trading system is no longer (or not currently) tradeable. Some of the criteria to look at when you are reviewing your trading system include:

•Chart and Indicator Settings – If different chart or indicator settings make the trading system profitable again, then it is probable that the market conditions have changed, and the trading system needed adjusting to suit the new conditions.
•Different Markets – If no combination of chart and indicator settings make the trading system profitable, but the trading system is profitable on a different market, then perhaps the new market is more compatible.

If neither modifying the trading system, nor the market, makes any difference, then the trading system should be traded carefully (or not at all) until its profitability increases to its usual level again.

 

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