The cardinal sin of trading is changing a trading method as soon as you run into your first losing streak. Many traders get easily frustrated and demotivated when they encounter a string of losses. Even though this is a natural behavior, behaving correctly in times of adversity is important for your longevity as a trader. The points in this article will help you deal with losing streaks more effectively along with tips to help you navigate through drawdowns like a professional.
Is your method really broken?
This is the starting point during every losing streak. First, you have to rule out the possibility that it is you who is causing the losses. More often than not, it’s not your trading method that is to blame and the trader is the weakest link. Thus, we recommend going over your most recent performance and take the time to audit your trades. Take a look at your entry, the overall scenario, the quality of the setup and how you have managed your trade. Did you really follow the rules and adhered to your trading principles or did you violate them?
Most losing streaks are not caused by a flawed trading method and it’s important to understand the origin of your losses to make the right decisions going forward.
Leveraging losing streaks to become a better trader
In all high-performance fields, champions are made during times of adversity. When everything goes well and you are winning, there is often no need to look for ways to improve the approach. Only when business leaders, athletes or other high performers experience losses and difficulties, it forces them to look at what they are doing and challenge the status quo.
Thus, when traders find themselves in losing streaks, they should step back and analyze what is going on:
- Have the markets changed?
- Did the way volatility and momentum manifest on your charts manifest change (bull vs. bear market and the speed of price)?
- Have markets conditions changes (trend vs range)?
- Has the risk environment changed?
- Did the fundamental environment change?
It’s not necessary to get too hung up on the individual points, but you should try to understand the market context you are trading in. Then, you can see what is causing your trading method to perform poorly and adjust accordingly.
Don’t dump your whole method. Follow those tips instead
Traders often dump their whole method too soon and they think that they have to find something completely new to become better traders. Every time you change your approach, you have to completely re-learn everything that makes up your trading method and you eliminate all previous progress and effort. The professionals, on the other hand, understand that they only have to make small and very specific adjustments to potentially improve their trading and end their drawdown.
Here is a list of the things that a trader can change and what it means for his/her trading method:
#1 The way he/she takes entries
There are usually two ways how entries can be adjusted:
1) Entering earlier when you see that you miss a lot of trading opportunities
2) Entering later when you see that price movement gives you large drawdowns
We also recommend using a checklist to ensure that you are following your rules. A checklist is often the fastest and most effective way to eliminate some of the emotionally caused trading mistakes.
#2 Adjusting indicators
First, you have to understand the current market environment. Are markets ranging or trending? Furthermore, is price moving fast and erratic or slow and steady?
Make sure that you are using the right indicators for the right market context: oscillators during ranges and momentum indicators during trending markets. Adjusting periods setting can further help: use slower period settings when markets are being erratic and faster period settings when markets are slower.
#3 A different approach to stop loss orders
Adjusting stop loss placement is one of the most important aspects and here are the two possible scenarios:
1) When volatility and momentum is up, you should use wider stops to avoid stop runs during volatility spikes
2) Wen volatility is low, you can use smaller stops because price is not moving as much
#4 Improving profit taking
The same principles apply to profit targets. You should user more conservative targets during low volatility markets because price will not move as much. And, use wider targets when volatility and momentum are up to maximize profit potential.
#5 Risk management during losing streaks
Finally, you have to make sure that your risk management is not impacting your performance and emotions negatively. Most traders make the mistake of increasing risk during a losing streak because they want to make up for the losses faster. This usually ends in a much bigger drawdown.
Instead, we suggest keeping your risk constant as long as you don’t feel scared or fearful during losing streaks. Every streak will end sooner or later. Just make sure that you don’t make any unnecessary mistakes that widen it and prolong it.
There is a substantial risk of loss in futures and forex trading. Past performance is not indicative of future results.
