This week’s question comes from Peter, who asks:
What should one do during a losing streak?
Losing money is never fun. It doesn’t matter if you’ve been trading for five months or five years, it’s never pleasant.
That makes a losing streak the epitome of a bad experience for a trader.
Not only do you lose money over and over again, you’re also forced to deal with the lack of confidence that follows.
How you handle that kind of pressure will define your trading career. Dare I say, it will determine whether or not you become successful.
After all, losing is part of the game and losing streaks are no exception. So if you aren’t able to stop the bleeding and recover, how can you possibly expect to become consistently profitable?
The good news is that there are a few simple steps you can take to not only stop the loss of money, but also regain confidence and eventually recover your account balance.
In this post I’ll share five simple steps you can use to manage a losing streak and overcome the loss of confidence that follows. I’ll discuss how to identify the problem as well as teach you a one-two punch that will get you back in the game in no time.
Let’s get started.
How Do You Define a Losing Streak?
This may sound obvious, but you can’t address a losing streak without being able to identify when one has occurred.
My experience tells me that far too many traders rely on blind luck here. They incorrectly believe that if they just push through a losing streak things will magically turn around.
Far too often, that line of thinking leads to a blown account— rather than a miraculous recovery.
So how do you define a losing streak? Is it three losses? Four? Five?
There’s no universal definition. But instead of thinking in terms of the number of losing trades, I like to think about drawdown.
Drawdown refers to the peak-to-trough decline during a specific period, typically measured on both a monthly and a yearly basis.
It’s usually shown as a percentage and is the best way to measure whether or not you’ve been hit by a losing streak.
My current drawdown rule is 5% per month. If I lose more than that in a single month it signals that I’ve hit a losing streak. It also forces me to stop trading until a new month begins.
If you don’t have a similar rule, you may want to spend some time thinking about how much you’re comfortable losing before a hiatus is in order.
1. Stop Trading
When hit with a losing streak, the very first thing you should do is stop trading. I mean walk away from your charts completely. It isn’t enough to just stop pressing the buy and sell buttons.
You need some time to clear your thoughts. How much time is up to you, but I’d say a day or two is the minimum amount of time you’ll need to regain your composure.
Don’t make the mistake of trying to trade during this time, or worse, trying to make back the money you lost. You’ll only compound the problem.
Moreover, attempting to trade after a losing streak can foster bad habits like revenge trading and overtrading, to name a few.
When hit with a losing streak, one thing I like to do is to focus on what I have rather than what I just lost. By doing this, I’m able to channel any negative thoughts about what just happened into something more positive.
Focusing on what I have also puts me in a more defensive mindset which is key after suffering through a few losses.
That doesn’t mean I don’t try to figure out what went wrong. But it does mean I don’t beat myself up over a few losses.
If you’re having trouble walking away from your charts, find something else to do. Spend time with your family, go fishing or play your favorite sport. Anything that gets your mind off of trading will work here.
2. Identify What Went Wrong
The second step is to figure out what went wrong. What was it that caused you to lose so much money over a relatively short period?
Were you upset that week or month? How was your health?
Being sick or dealing with significant life events can take a toll on your trading.
One of my worst months ever happened about a year ago. When I reflected on what went wrong, I realized that I had been sick for almost two weeks. I guess I was too focused on my work to realize I wasn’t feeling well.
To make matters worse, I was also coping with the loss of my grandfather. He had passed during the week leading up to the losing streak.
When I looked back on that week, it was easy to figure out why I wasn’t performing at my best.
If nothing significant happened during or leading up to your losing streak, it’s time to dig into your trading journal to find the culprit.
But finding the answer can be tricky. With so many things to review, you may never be able to put your finger on the problem.
That’s okay. What’s important here is that you have the data to fall back on and you made the effort to analyze it to find the solution.
Sometimes losing streaks just come down to a bad week or month. You were off your game for whatever reason, but at least you were able to remove yourself from the market to stop the bleeding.
3. Listen to Your Emotions
I received an email a couple of weeks ago asking how I know when it’s time to re-enter the market after a losing streak.
The short answer is to let your emotions tell you when it’s time.
In other words, do you still feel the need to make back the money you just lost?
If so, you need more time to cool off. That’s called revenge trading, and it’s one of the fastest ways to blow your account.
Are you still upset or frustrated about your recent losing streak?
If yes, more time off is probably the way to go.
Nobody likes to lose money, but if you approach the market with that kind of emotional baggage, you’re sure to inflict more damage upon both your confidence and your trading account.
You’ll know when it’s the right time to settle back into your routine. Just take your time and don’t rush it.
4. Reduce Your Trading Frequency
Now that you’ve given yourself some time to cool off and collect your thoughts, it’s time to get back to work.
But just because you’re back to trading doesn’t mean the rehabilitation process is over.
Far from it.
One thing I like to do when faced with a losing streak is to reduce my trading frequency for a while. So if I was taking an average of eight setups per month before the losing streak, I might aim for four setups over the next month.
This is a great way to ease yourself back into the market. Take it slow and steady to make sure you’re firing on all cylinders and won’t be tempted to revenge trade.
Think of it like this…
A race car driver doesn’t just hop back in a car after a wreck and do 180 mph again. The driver needs to go through a process in order to rehabilitate their mind and body.
While we aren’t doing 180 mph when trading (at least I hope not), the idea of easing back into the game is the same.
So be sure to take it slow after a losing streak. Make it a point to regain any confidence you may have lost as a result. And be sure you never try to win back the money you lost.
5. Cut Your Risk in Half
So you’re back to trading and have reduced your frequency. The final step you should take is to cut your risk in half. So if you were risking 2% of your account balance on each setup, try using 1% instead.
You don’t necessarily need to cut it by half, but I do suggest that you reduce your risk by some amount.
Even if you follow every step in this post and do everything by the book, chances are you still have some lingering negative emotions floating around.
An easy way to combat any lingering negative emotions is to remove the energy source. If greed and fear feed on money gained or lost, why not reduce the potential gain or loss for each trade?
Just like reducing your trading frequency, cutting your position size can help ease you back into the market.
Also, by cutting your risk you reduce the risk of falling victim to revenge trading. You put the focus back on the process of good trading rather than trying to make back the money you just lost.
I hope the five steps above help you the next time you’re faced with a losing streak. While they’re never fun, losing streaks are just part of the cost of doing business in any financial market.
When faced with consecutive losses, the first thing you need to do is stop the bleeding. Only then will you be able to determine what happened in a logical, unemotional way.
Next, you need to identify what went wrong. Were you upset that week or month? How was your health? If your health and emotional stability weren’t the culprits, it’s time to dig into your trading journal to find the answer.
Pay attention to your emotions. They will tell you when it’s time to get back in the market.
Once you decide you’re ready to jump back in, try cutting your trading frequency in half. It’s also a good idea to reduce your position size to rebuild confidence.
Your Turn: Ask Justin Anything
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