How to Deal With a Losing Streak
When trading the financial markets, Forex included. You will eventually face the horrible situation of being “out of the zone”.
Especially after you find a trading system that works for you and you are trading confidently since things seem to go your way for a period of time.
Whatever your strategy is, and especially if you are day-trading or scalping, you could find a nasty 4, 5, 6 losing trades in a row or even a bigger losing streak (when scalping I once find myself with a 23 losing trades streak).
It can be very confusing that after everything was working ok and you did all the steps right: you studied your system, you back tested, forward tested, demo, went live, and you followed all the steps. You had everything set up and things started to go OK for you. But, suddenly your “magic” stops working, every time you enter the markets your trade seems to go exactly against you.
You start losing confidence in yourself and in your system, so you ask questions like:
Is my system flawed?
Am I entering the markets when I shouldn’t?
What am I doing wrong?
You start to have second thoughts when you see a setup, sometimes you’re even afraid to enter a trade and simply pass from trading, just to see that particular setup become a winner, only to make you feel even more insecure and lost.
Yes, I know, it can be a terrifying situation. Especially if you are trading with real funds you can start to simply lose it and even enter a panic situation.
Ok so now that we’ve identified the situation let’s go on and fix it, bare with me.
5 Steps to Put your Trading Back on Track
So the steps to stop and put your trading back on track are:
Stop trading: After 3 or 4 losing trades (depending on your system you should know this number) simply stop and take a break. Close your trades and separate yourself from the markets for at least a whole cycle, depending on your trading style, if you are day trading separate at least for a day.This will give you some perspective and help you stop a negative train of thought that might be affecting your trading performance. Do something unrelated to trading, go with friends, take a walk, whatever separates you from your trading terminal. Don’t check the markets or open your account for that cycle.
Come back the next day and take a look at your trading rules and system, without trading at all. Just take your time to study again and refresh in your mind whatever your system is. Sometimes when we repeat a process several times we tend to over simplify it and skip important steps. This can be dangerous in Forex trading.
Check your trading journal and compare your losing streak with others you might have from the past. Is it comparable? Is it worse? Is it much worse?
Analyze your losing trades one by one and ask yourself the following questions for each trade:
Was the setup a 100%? Was I too optimist to enter?
Did I follow my rules and my system flawlessly on this one?
Was I applying correct money management to each one of these trades? (Sometimes we start to become overly optimistic from our winnings and just place our stops too tight, not to risk too much, but at the same time skipping some important rules from our system and changing our odds of winning)
After this process you should be able to see:
If your losing streak was normal within the expectancy of your system, no reason to panic, just learn that these kind of losing streaks are part of your trading system. ßIf this is the case then just go back to trade normally and feel confident that your winnings will come back.
If you were maybe simplifying or outright ignoring your rules hence trading in a more random like way. If this is the case analyze your behavior and try to pinpoint the reasons that led you to ignore your system. Once you’ve identified these patterns you can also stop them when they appear. Work on your psychology, for example: you were losing because you had a rough week and were trying to use trading as a way to feel better from winning money hence not taking into consideration all the rules from your system and more like seeking to be in the markets for comfort. After you find the psychological reason, depending on your personal situation, you can give yourself some time to analyze before going back to trading live
If you backtested, and did enough demo you shouldn’t find yourself in this situation. I’d normally leave the ‘system tweaking’ as a LAST RESORT. Because, more often than not, the problem is within ourselves as a traders and not because of a “flawed” system. If we start to tweak and change or even abandon our systems for a new one, we will have to start from scratch a process that will take you months to do again and will take a toll on your confidence.
Losing streaks are normal in any trading system, they can come from various reasons and we need to become good at identifying them. I’d say the most common is that simply trading is not an exact science and we tend to ask too much from our trading and expect outlandish results.
If you understand the normality and recurrence of these events you will stop panicking and taking or skipping trades that were not aligned to your system in the first place.
The good part of a losing streak is that you will know your system better and, even more important, you will understand your psychology as a trader in a much deeper way.
Maybe you were simply sabotaging yourself after a few winning trades and that’s why you are suddenly losing.
Maybe you were taking it too lightly and thinking you became invincible after winning some bucks in the Forex Markets. Skipping your own rules and losing.
If everything fails and the winnings don’t come back
You did everything outlined before and your winnings don’t come back and you are even considering abandoning your system and start to look for a new one take a look at this two points.
You should always consider a threshold in your trading rules to go back to Demo trading. For example: “If I lose 25% of my account I’ll go back to demo trading until I can become profitable again for at least 2 months”.
I know it can be frustrating to go back after everything seemed to go right, but we are in this business to make money, not to prove a point, or to heroically come back from the ashes and go back to profits after losing 95% of our accounts. So if your capital is at risk just pull the breaks and go back to demo trading. You’ll be glad you did.
Consider if there has been a major change in your lifestyle that is affecting your trading. For example:
You have a baby now and can’t concentrate to scalp the entire NY session.
Or, you decided to go on a 1-year trip and can’t find a way to trade everyday on a reliable Internet connection.
Or you’ve got a day job and come back super tired everyday and can’t really concentrate on trading the news like you did.
If this is the case, you can start looking to adapt your system to a major change in your life.
I already passed through this process twice, going from day trading to scalping to swing trading, because my lifestyle changed and my personal situation demanded that I change the way I trade instead of trying to force a system that was not working for me anymore.
As I always try to explain, trading successfully is not so much about a concrete system, but about how you adapt that system to your personal situation. You must always be very attentive to your ongoing aspects of your life and treat trading as a business: Keep records, study your past performance and be ready to go back to your victories and loses from the past to understand how to keep being profitable.
Let me know if you have been in a losing streak and if you were able to come victorious from it.