The following trading article on recovering from losing streaks is the opinion of Optimus Futures.
One of the most dreaded moments in trading is finding yourself in the middle of a losing streak – posting a consecutive string of losses, especially for inexperienced and newer traders
Trading, being a game of probabilities and possibilities, inevitably makes for a time when even the most experienced and professional traders will find themselves in a ‘losing streak’. The troubling part is hardly ever the streak itself, but the way traders handle and react to the situation.
In this article, we discuss what you can do as a trader to potentially rebound from a losing streak psychologically and strategically.
Relax and Take Time Off after Losing Streaks
A grave mistake to make when you are in a losing streak is to continue to trade in an attempt to quickly make back the lost money. Often referred to as ‘revenge trading’, anxiously pulling triggers on trading opportunities to quickly wipe off the red marks in your trading journal is often key to a prolonged losing streak.
Losing money is often an emotionally challenging for newer traders, resulting in a negative mindset and a nervous approach to trading. Continuing to trade with this mindset can easily make them prone to making (or repeating) mistakes and exercising poor judgment in making trading calls or squaring them.
A good idea, instead, is to take some time off from trading to allow the mind to relax and recover from the negative experience. This is especially important to build your long-term trading confidence. Prolonged losing streaks resulting from frantic attempts to recover from a handful of bad trades will not help much in allowing you to evolve into a confident and successful trader.
Taking time off to pursue activities you enjoy besides trading helps to restore emotional stability and the confidence you will need to rebound back towards consistent profitability.
Revisit Losing Trades and Write Down Lessons
When you are ready to get back to the game with a fresh mind that is not overindulging in negative emotions resulting from your recent losing streak, the first step you need to take is to revisit your losing trades.
Many traders don’t want to talk or think about their losing trades as part of a strategy to recover their trading confidence. This can be a big mistake because analyzing losing trades will hone your trading skills just as much as analyzing winning trades, and you could be missing on big learning opportunities by not studying such trades. Essentially, you can learn what trades you should say no to and also learn to avoid impulses that are based on a gut feeling.
The goal in this stage is simple. You need to differentiate between genuine losses and misjudged trades. Genuine losses would be trades you qualify as high quality that still returned a loss due to an unexpected market move. Misjudged trades would be the ones you took losses on because of a misjudgment on your part – either when pulling the initial trigger or as you were managing/exiting the trade.
It is not uncommon for a losing streak to often comprise of both variations of losing trades. A couple of back to back unlucky trades, for example, could easily upset the mindset of a new trader causing him to swing towards either an ultra-aggressive or an ultra-conservative mode, prompting an error on the following trades.
It is, hence, also worthwhile to try and recall your emotional states between the losing trades in the streak to determine key points relating to your mindset and approach to trading. Were you emotionally solid between the losses and still treating each trade setup on its own merit, or were your latest losses playing on your mind at key decision moments during the streak?
Often a simple impartial analysis of the trades themselves will reveal a lot about your emotional state. If you can classify more of the losses to probability and bad luck, chances are you that had a mature approach to your trading and the losing streak was likely unavoidable anyway.
If on the other hand, you find that most of the losing trades can be easily traced to mistakes in your decision making, it could be time to reflect on either your approach to trading as a whole or your trading strategy itself. And that brings us to the subsequent sections in this article.
Refine your Trading Approach
If the analysis of your consecutive losses reveals loopholes in your trading strategy, it may be time to revisit your trading rules and refine them further for improved trading results.
Perhaps you are being too conservative in your trade management and not allowing enough room and cushion for volatility in the market? Or on the contrary, maybe your strategy calls for aggressive actions that could be hurting you.
You could be using far too many technical indicators that could be yielding frequently mixed trading signals, or perhaps you are not using enough at all for a clear-cut objective trading signal. Or perhaps you need to refine your trailing loss strategy or your style of booking profits (partial profit booking vs taking full profit).
There can be several aspects of a trading strategy that could be hurting your results and landing you in the uncomfortable position of dealing with strings of losses. Always be prepared to be flexible enough within reasonable means to alter and tweak your strategy to make it more effective.
Manage Expectations and Emotions
The other extremely common reason why traders often find themselves in a losing streak (besides what we discussed in the above section) is poor emotional stability and the lack of proper management of expectations.
If you find that the losses you’ve booked are mainly as a result of poor decision making but are confident that you have a working proven strategy, the problem could well be in the way you perceive your losses.
A true trading edge relies on probability stretched out on a sufficiently large enough sample size. Experienced traders will know that a handful of trades mean nothing and that a much larger sample size is needed for an edge to truly play out in the market. Newer traders – often building their experience trade to trade – can be more emotionally driven by the result of a singular trade.
Such traders are more prone to falling back on a negative mindset than more experienced traders who have seen their edge play out in the market in the longer term and hence do not break a sweat at the sight of a few losses grouped together.
When you stop seeing a loss as a mere dent on your equity curve, but rather as part of a larger process spread out over a lot more trades, gaining emotional stability becomes easier. A lot will also depend on your risk management strategies too. Taking down a 0.1% loss on a trade is easier said and done compared to wiping out 5% of your equity on a trade you were really confident would work.
General Recommendations on Recovering from Losing Streaks
Besides the above-mentioned steps, you can also reflect on some other factors to help you avoid losing streaks in the future as much as possible.
Maintaining a trading journal comes first and foremost. A lot of traders fail to maintain detailed trading journals that not only record their results but analyzes each trade for key learning points.
A trader must periodically revisit the trading journal to analyze the trading performance and draw important conclusions. Often, the steps highlighted regarding whether your strategy needs more refinement or if you need to work on your mindset become very conspicuous upon a quick glance of a well-maintained trading journal, in turn making it easier for traders to rebound from bad spells of trading.
It is also worthwhile to be studying the overall market conditions and behavior too. Sometimes, traders who work with trading strategies suited to particular market conditions will book frequent losses when they apply the strategy to a different market condition. In this case, instead of taking the route of altering your strategy, it is advisable to rather patiently wait for suitable market conditions to avoid future strings of losses.
The same would also apply to well-known and documented periods of high volatility and reduced liquidity for your particular market. For most financial markets, for example, the month of December is often associated with more volatile moves as trading volumes get withdrawn ahead of the holiday season. It is not uncommon for traders to often book frequent losses in such periods. Conscious awareness of the best and worst times to trade your market will potentially help you avoid losing streaks in the future.
As inevitable and real as losing streaks are, strategies to avoid them as much as possible are also abundant and simple to apply, given that a trader is conscious enough to be willing to address the loopholes, if any, and quickly fix them and learn the lessons to avoid similar instances in the future.
Financial markets will always surprise even the most experienced of traders. The possibility of an occasional losing streak cannot be denied. You certainly have some work to do if you are experiencing frequent losing streaks. Following the above-mentioned steps and addressing the loopholes in your trading approach should serve a simple fix.
Finally, we also recommend you dedicate time and thought when you experience winning streaks as well. Do not simply take winners for granted. Turn them into a learning experience. An efficient and thorough analysis of both winning and losing streaks will help you learn what you are doing right, what you are doing wrong, and uncover the patterns that you should rely on if you decide to pursue trading as a career.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.