We all have streaks of bad luck in the market from time to time. But what determines whether it will be a debilitating losing streak that will cause you to bust your trading account, or just a “normal” losing streak? In any case, how do you bounce back after a losing streak? Emotions run high and we can quickly see our trading profits melt away in the market if we are not careful.
In today’s tutorial, I’ll share with you what I’ve learned about how to deal with losing streaks in the market in my 15 years as a trader. No matter how you understand it, losing streaks are ugly and certainly not fun, but if you understand them correctly, they should not pose a threat to your long-term success as a trader.
onest. – Understand the “nature” of losses
The first thing you need to do to properly recover from a losing streak is to understand the nature of market losses. What do I mean by the “nature” of loss, you ask?
Well, it’s really quite simple: a trader can suffer two main types of losses; what I call “normal” loss and emotional or emotion-induced loss. So, the first thing you need to ask yourself about your losing streak is: “Were these losses normal or emotional?”
- A typical loss is a loss that is a normal statistical part of your trading edge/strategy. This means that in a series of trades using any trading method, a certain percentage of trades will be losing, EVEN IF you trade consistently and disciplined. There is no method that wins 100% of the time, you know, it’s a fact, if there was, everyone would be billionaires. So understand that normal loss going to happen and they are a natural part of any trading strategy.
- Emotional loss is exactly that; one is caused by emotions or overly emotional. This means a loss caused by over-trading (which can be caused by a range of emotions such as greed, anger, revenge, etc.) or a loss that was greater than you can imagine because you risked too much due to for greed. – trust or, again, revenge (an attempt to “return” the lost money). These types of losses are dangerous and can lead to huge losing streaks that will eventually cause you to lose your entire account.
So, now that you understand the nature of market losses, the first thing to do is to have an honest conversation with yourself and determine if your losing streak was due to normal or emotional losses. If it’s because of emotional loss, you clearly have work to do, so keep reading…
2th – Understand that your trading advantage takes time to manifest
Another important part of recovering from a losing streak is simply understanding that any loss, or even a series of losses, doesn’t matter in the long run of your trading path.
As I said in point 1 above, regular losses are part of any trading method. Another aspect of these losses is that we never know when they will appear in a series of trades.
For example, imagine you make 100 trades in one year (this is just an example). Now imagine those 100 trades as blue and red balls shuffled randomly in the pot. If you stick your hand in without looking at the marbles and pull out one of them, you don’t know if it will be blue or red, do you? Of course, until you look.
Now imagine that the blue balls are winning and the red balls are losing. If your trading method wins 60% of the time, it means that 40% of the balls in the pot will be red, i.e. losing. Thus, within 100 marbles (trades), you can expect to draw 40 reds (losing trades). But in any trade (or when diving into a marble jar), you never know if the one you pull out will be red or blue until it happens. I discuss this in more detail in my article on The Key to Latest Trading Success.
The point of our lesson today is that your trading strategy or advantage requires a long series of trades to make money, and within that series of trades it is perfectly normal to have rows or bands of losing trades. Imagine you are tossing a coin: you have a 50% chance of getting heads or tails, but you can easily get 10 tails in a row, but after a SERIES of, say, 100 tosses, it will level out to 50% heads and 50% tails. So you can’t afford to get overly emotional about a losing streak with “normal losses” as discussed above, and you especially shouldn’t get emotional about any single losing trade because in the course of a larger series of trades it unrelated.
3rd– Understand that negative emotions do not help you make money again
Next, understand that if you fall into the emotional loss trap and worry too much about any one losing trade or losing streak as discussed above, you are not helping yourself get over the 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 losing streak, but you must find a way to do just that. You have to “swallow” these bad streaks and just accept that they will happen and move on without giving in to emotions. If you succumb to the negative emotions that arise in your mind due to a series of failures, you will lose even more money and damage your trading mindset and your trading account even more.
I like to use what I call the “forest for trees” approach. As the old saying goes, you should see “the forest for the trees”, which means not getting lost in the details of anything, keep your mind and focus on the bigger picture. In trading, this means you can’t get emotional or mentally bogged down in a losing streak, instead you see the bigger/longer-term picture.
Remember that your profitability and success will be measured over the entire year of trading or even longer, not just one day, week, or month. If you stay disciplined and stick to your trading plan on a large enough sample size of trades, you should eventually come out on top, provided you use an efficient trading method like my price action strategies of course.
4th – Take a break from the market (if necessary)
If you have indeed fallen victim to “emotional losses” and have severely damaged your trading account, it is probably best to take a break from trading and regroup.
Use what you’ve learned from this lesson, my other lessons, and my Forex trading course to get back to the drawing board and see where you went wrong. Above all, learn from your mistakes and don’t let them hold you back.
Recovery from a bad streak starts with understanding the nature of bad streaks, as we discussed in this lesson. Then, if you have determined that your losing streak was caused by something you were doing wrong (emotional loss), you need to develop a plan of action to correct what you were doing wrong. This often starts with getting more information and getting some serious in-depth trading education to make sure you understand what you are doing in the market and are confident in your trading strategy.
If indeed your losing streak was caused by “usual losses”, then continue trading with your method and stick to your trading strategy. I always like to think that a normal losing streak just means I’m closer to a winning trade or my next winning streak.
I hope you enjoyed today’s lesson and learned more about how to deal with losses in the market. As traders, we have to deal with losing trades and learn how to deal with them the right way because, as cliche as it sounds, losing is actually part of winning.