How to deal with loosing streaks in trading

How often have you felt “immortal” after a series of 5 winning trades and have you lost a big amount the very next one because you have taken too much risk? And how many times have you changed something in your trading plan after 4 consecutive losing entries because you’ve decided that your trading strategy has run out and is no longer working?

It is important not to forget the law of “the big numbers,” which in this case states that such a series of winning or losing trades is quite normal with a large enough sample of consecutive trades. It is very important for every losing series of 1, 2 or 5 losing deals not to blame your trading strategy and to think long-term.

Random results really challenge our way of thinking, and people try to invent their own rules or ideas to help them create a sense of control over the events they do not. People who believe they have some control over completely random events are less cautious about risk and overestimate their chances of defeating the probabilities. In trading, this can easily lead to greater risk and overconfidence.

Accept the chance and remember that a deal is completely independent of the previous one. To make things even worse, the outcome of a particular deal is totally random and out of your control. Creating arbitrary rules that give you a sense of control can lead to excessive optimism. This would eventually play you a bad joke and would eventually bankrupt your trading account.

Many traders believe that a series of 6 losing positions means that their trading system is no longer working. For some of us it does not even take six consecutive losses before changing our trading style. Do not despair this is not true at all. If you have the patience and stick to the established trading plan a little longer, the results will be positive (if of course the trading system you have chosen is properly structured).

Here is an example that will bring more clarity:

Assuming that your strategy’s win rate is 60%, then math would look like this: You will have:

2 consecutive losing trades on average every 6
3 consecutive losing trades on average every 16
4 consecutive losing trades on average every 40
5 consecutive losing trades on average every 98
6 consecutive losing trades on average every 245

As you can see, the losses are part of the trading, and if someone tells you that he has 100% win rate or no losing month or year, he is probably extremely inexperienced or extremely dishonest with you.

In conclusion: During losing streaks, do not lose confidence in your system, but be careful with over-confidence when you are winning. Always follow your plan and do not deviate from it – make decisions with your brain, not with your heart. Do not make any changes to your trading system unless you are sure you really need it. Concentrate on executing your plan not on the results.