We all have losing streaks from time to time in the market. But, what determines if itâ€™s a debilitating losing streak that leads to you blowing out your trading account or just a â€˜normalâ€™ losing streak? Either way, how do you bounce back after a losing streak? Emotions get stirred up and we can quickly see our trading profits â€˜melt awayâ€™ in the market if we arenâ€™t careful.
In todayâ€™s lesson, Iâ€™m going to share with you what I have learned about how to handle losing streaks in the market over my 15 years as a trader. No matter how you slice it, losing streaks arenâ€™t pretty and they certainly are not fun, but if you understand them properly they should pose no threat to your long-term success as a trader.
1stÂ â€“ Understand the â€˜natureâ€™ of losses
The first thing you need to do in order to properly bounce back from a losing streak, is to understand the nature of losses in the market. Now, what do I mean by the â€˜natureâ€™ of losses you ask?
Well, itâ€™s really pretty simple: There are basically two types of losses a trader can have; what I call a â€˜normalâ€™ loss and an emotional or emotion-induced loss. So the first thing you need to ask yourself about your losing streak is, â€œWere these losses normal ones or emotional ones?â€
- A normal loss is one that is a normal statistical part of your trading edge / strategy. This means, over a series of trades in any trading method, a certain percentage of trades taken will be losers, EVEN IF youâ€™re trading with consistency and discipline. There is no method that wins 100% of the time, you know that is a fact, if there were, everyone would be billionaires. So, understand that normal losses areÂ going toÂ happen and they are a natural part of any trading strategy.
- An emotional loss is exactly that; one caused by emotion or by being overly-emotional. This means, a loss caused by over-trading (which can be caused by a number of emotions like greed, anger, revenge etc.) or a loss that was larger than you are comfortable with because you risked too much due to greed, over-confidence, or again revenge (trying to â€˜make backâ€™ lost money). These types of losses are the dangerous kind that can lead to huge losing streaks that end up with you blowing out your entire account.
So, now that you understand the nature of losses in the market, the first thing to do is have an honest conversation with yourself and determine if your losing streak(s) was caused by normal or emotional losses. If it is from emotional losses, you obviously have more work to do, so keep readingâ€¦
2ndÂ â€“ Understand that your trading edge takes time to play out
Another big part of bouncing back from a losing streak is simply understanding that any one loss or even a string of losses, is insignificant in the longer-term scheme of your trading journey.
As I discussed in point 1 above, there are normal losses as a part of any trading method. Another aspect of such losses, is that we never know when they are going to show up over a series of trades.
For example, imagine you take 100 trades over the course of one year (this is just an example). Now, imagine those 100 trades as blue and red marbles all mixed up in a jar randomly. If you stick your hand in without looking at the marbles and pull one out, you donâ€™t know if it will be blue or red do you? Not until you look at it of course.
Now, imagine blue marbles are winners and red marbles are losing trades. If your trading method wins 60% of the time, that means that 40% of the marbles in the jar will be red, losing marbles. Thus, over the course of 100 marbles (trades) you can expect to pull out 40 red ones (losing trades). But, on any one trade (or dip into the marble jar), you never know whether that one you pull out will be red or blue until after it occurs. I discuss this more in-depth in my article on theÂ key to last trading success.
The point for our purposes of todayâ€™s lesson, is that your trading strategy or edge needs a large series of trades to make you money, and within that series of trades itâ€™s perfectly normal to have strings or streaks of losing trades. Imagine you are flipping a coin: you have a 50% chance of heads or tails, yet you could easily get 10 tails in a row, but over a SERIES of say 100 flips, it will even out to closer to 50% head and 50% tails.Â So, you cannot allow yourself to get overly-emotional about a losing streak of â€˜normal lossesâ€™ as discussed above, and you especially should not get emotional about any one individual losing trade, because over the course of a larger series of trades, itâ€™s irrelevant.
3rdâ€“ Understand that negative emotions are not helping you make money again
Next, understand that if you fall into the traps of emotional losses and getting too worked up about any one losing trade or streaks of losers, as discussed above, you are not helping yourself overcome any losing streak, you will only make it worse.
I know that even if you understand points 1 and 2 above, it can be difficult to swallow even the most normal and statistically natural of losing streaks, but you must figure out a way to do just that. You must â€˜swallowâ€™ these losing streaks and just accept that they will occur and move on without getting emotional. If you give into the negative emotions that losing streaks kick up in your mind, you will lose even more money and further damage yourÂ trading mindsetÂ and your trading account.
I like to take what I call the â€˜forest for the treesâ€™ approach. As the old saying goes, youâ€™ve got to see the â€œforest for the treesâ€, meaning donâ€™t get lost in the details of something, keep your mind and focus set on the bigger picture. In trading, this means you cannot become emotional or get bogged down mentally by a losing streak, instead, see the bigger / longer-term picture.
Remember that your profitability and success will be defined over the course of a full year of trading or even longer, not on any one day, week or month. If you remain disciplined and stick to your trading plan over a large enough trade sample size, you should come out on top in the end, of course that is assuming you are using an effective trading method like myÂ price action strategies.
4thÂ â€“ Take some time off from the market (if needed)
If indeed you have fallen prey to â€˜emotional lossesâ€™ and youâ€™ve heavily damaged your trading account, itâ€™s probably best to take some time off from trading and regroup.
Use what youâ€™ve learned in this lesson, my other lessons and in myÂ forex trading courseÂ to go back to the â€˜drawing boardâ€™ and understand where you went wrong. Most of all, learn from your mistakes and donâ€™t let them hold you down.
Bouncing back from a losing streak starts with understanding the nature of losing streaks as we discussed in this lesson. Then, if you determine that your losing streak was due to something you were doing wrong (emotional losses) you need to develop a plan of action to fix what you were doing wrong. This often begins with learning more and getting a solid in-depthÂ trading educationÂ to be sure that you understand what you are doing in the market and have confidence in your trading strategy.
If indeed your losing streak was just from â€˜normal lossesâ€™, then continue on trading your method and sticking to the trading strategy. I always like to think that a normal losing streak simply means that Iâ€™m closer to a winning trade or my next winning streak.
I hope youâ€™ve enjoyed todayâ€™s lesson and learned more about how to handle losses in the market. As traders, we need to deal with losing trades and learn to handle them properly, because as clichÃ© as it may sound, losing really is part of winning.