How to Bust Out of a Trading Losing Streak

Assuming a trader has a trading plan they follow and some experience, nothing rattles a trader more than a trading losing streak. For the sake of this article, a losing streak is a sustained drawdown in capital where loses occur trade after trade or day after day, or a losing streak can even be a “flat period,” where prior success seems a distant memory and you’re just treading water.

For both new and experienced traders, how they handle the losing streak is a defining moment. Those who don’t handle it properly will likely face ruin, or months/years of trying to find their way back to profitability. Those who do handle the situation well will bounce back from the losing streak quickly. This latter group of traders typically have foresight, understand probabilities at a real-world level, and accept trading losing streaks as part of an overall profitable system.

The Trading Losing Streak: Understand Your Strategies

People, and especially men, have a tendency to try to fix something even if it isn’t broken. When my girlfriend tells me about something she is struggling with, I try to fix it. I must remind myself there’s nothing to fix. It’s communication, not necessarily a call to action.

Your trading plan works the same way. Your trading plan communicates with you through trading statistics–win rate, reward/risk, expectancy, etc. This is also just communication, and not necessarily a call to action to change anything if the statistics move a bit…because they will always fluctuate.

In the Forex Strategies Guide for Day and Swing Traders I discuss a trend channel strategy. This strategy produces phenomenal results when markets are moving in relentless trend channels…like the 3.5 year trend channel seen in the S&P 500 from late 2012 to early 2015. That doesn’t mean every trade is going to be a winner, but it does mean lots of trading opportunities and typically solid results for this strategy.

When trend channels aren’t present or don’t last, profitability is reduced. It’s the job of the trader to discern when to implement a strategy and when not to.

The forex market, and the 46 pairs I swing trade (not every day of course), all have different movements. Sometimes pairs move in trend channels and sometimes they don’t. When trend channels are less frequent, fewer trades occur for this strategy. With a smaller sample size of trades, results often appear more random, or conditions aren’t as favorable and losing streaks or flat periods may occur.

I know this strategy has these tendencies. And if you look, you can even see on your charts that there are periods where the market respects trend channels and periods where it doesn’t (or they don’t form). Someone how doesn’t notice this, and is continually trying to take trend channel trades when there are none, may think something is wrong with the strategy. They keep losing and don’t understand why. The default response is to start making changes to a strategy in an attempt to make it profitable again. But the strategy is not broken. It is just that conditions are not right for the strategy, and so it may be best not to use that particular strategy right now. Don’t change the strategy, because it still works when conditions are favorable. Instead, use a different strategy or don’t trade if the strategy doesn’t align with current conditions.

Understand Trading Statistics

Traders also need to understand their win rate. If you tend to win 50% of your trades, that doesn’t mean the strategy will produce: win, loss, win, loss, win, loss….

A 50% win rate over many trades could take the form of: loss, loss, loss, loss, loss, loss, loss, win, win, win, win, win, win, win. Both examples result in a 50% win rate. If you make more on winners than you lose on losers, you still have a profitable 50% win-rate system. The latter example is far more likely to cause a trader to abandon their trading plan though. The latter has a longer losing streak and a longer drawdown period, but also a longer upswing period. Would it matter if the 7 wins came before the 7 losses? Mentally, after the seven wins in a row you feel invincible, but really it shouldn’t matter. The probabilities are still the same, the only difference is in the mind.

I am not saying that having a system that loses 10 trades in a row and then wins 10 trades in a row is a good thing. That is too “streaky” for my tastes. The example is just used to prove a point. A few losses in a row often isn’t a big deal, as it can still be part of the bigger (winning) picture. That said, I have been trading since 2005 and my wins and losses tend to be alternating, with only small streaks of wins and losses typically. If I start to see longer streaks of losses, I am likely applying my strategies at the wrong time, or I am not following my system.

If a plan is well established and tested, usually it’s better to stick with the plan through the losing streak than to try and fix it. And of course, make sure that conditions are right for the system/strategy you are using. If conditions aren’t favorable, then save your money until they are. Knowing when not to trade is even more important than know when to trade.

Breaking Out: Make Sure You’re On Solid Footing

A losing streak can cause traders to question their method. Even if it has worked for years, a losing week can be very unsettling to a day trader (or any trader)…especially if they rely on trading for their income. A losing month to a swing trader can result in the same thoughts. “Do I need to change my system?”

If you’re used to making 10 or 15% a month, and then you have a flat month, the psychology can play out in a similar way. Your income has disappeared and you’re likely to question whether you need to make changes.

If the system has never worked and you have no idea if it could work–because you haven’t tested and practiced the method–then you have a separate problem. This is why it’s important to pick one or two strategies and stick to them. At least then you can accumulate some data on those methods. If you make random trades there’s no way to quantify the strategy. Yes, you’ll have stats on your wins, losses and profitability, but since the reason for each trade is different, the data likely isn’t going to be useful or reliable. The more you trade a method and see how it functions, the more likely you are to trust it through the ups and downs (see: The 4 Stages of Trader Development).

If the Method is Solid, Trade Through the Losses

It may seem foolhardy, but when you face a losing streak you have to trade through it, without adjusting your method. This assumes you are still getting valid trade setups and conditions are still favorable for the strategy. Your trading plan should tell you when to trade and when not to trade.

As discussed above, if conditions aren’t favorable, don’t trade. For most traders I have worked with, their strategies are not the problem. Rather, they need to work on their analysis skills. That is their reading of market conditions to determine when they should and shouldn’t implement the strategy.

This is why it’s recommended you risk 1% (or less) of your account capital on each trade. Even a 10 trade losing streak won’t significantly draw down your capital using this rule. Several winners (that are bigger than the losses) and you’re back to square. No problem. If you risk more than 1% and hit a losing streak, you may not recover. You may have a losing streak, a couple winners and then another losing streak. If you risk 5% or 10% a trade, you’ll be obliterated. At 1% per trade you’re still fine. Over time your win/loss ratio will even out and you’ll see your account grow again.

It’s also recommended your strategy has some sort of filter that keeps you out of the market when conditions are poor and adjusts to volatility. For me, the trend channel strategy accomplishes this…no trend channel = no trades, and stop losses and targets are always based on recent price moves to accommodate for current volatility.

The Handling of A Losing Streak Affects Future Consistency

If you never trade through a losing streak, and instead change methods or make adjustments as soon as you have a few losses, it’s likely you’ll never attain any consistent success. Consistent success comes from relentlessly executing the advantageous probability of your strategy. No matter how that edge occurs, a strategy has an edge or it doesn’t. If it has one, you have to keep trading it.

You don’t see casino managers (the house) come down from upstairs to stop hands of blackjack because the house is losing money for a period of time. Casino managers know that given enough time the tides will shift back in their favor and their slight edge will be realized. Adopt the attitude of the casino manager in your trading; if you have a statistical edge, then you’re the house. Let your favorable odds play out.

Even if you’re an inexperienced trader, with no track record, you still have to think this way. Test a strategy for several months in a demo account. If it works, then trust it. Only risk 1% or less per trade, and promise yourself you’ll trade it through at least two losing streaks. Keep trading after the two losing streaks. By then you should have a good idea if this is a strategy you want to keep pursuing. If it’s profitable, even after two losing streaks, keep trading it.

If your mind is messed up from the losses, and you’re having a tough time focusing and seeing the valid trades, take a few days off. Then, trade a simulated account for a few days. This will help clear your head, gain some perspective, and get your confidence up with a few wins in the demo account. And if you are still losing money in the demo account, then at least you haven’t done any more damage to real account. Stay in the demo account until you’re feeling, and trading, like your old self. Only then step back in and start trading real money.

What About “Adaptability?”

I, and many trading articles, have used the word “adaptability” recklessly. When I say a trader needs to be adaptable, but don’t explain why, that could be interpreted as “I need to change something if I am losing” That isn’t necessarily the case. What I mean by adaptability is ‘letting go of the past.’ The last trade doesn’t matter; the only thing that matters is the trade right now, and executing it as the trading plan dictates.

Assume that oil has been falling for 4 months and every trade signal is a sell. Then one day I get a buy signal. Adaptability is being able to take that buy signal, which your trading system insists you take, even though everyone else in the world (including your own head probably) is telling you shouldn’t buy because oil has been dropping. Trust the system: that’s adaptability.

Adaptability is working on analysis skills so you can see when conditions are favorable for a strategy and when they aren’t. Adaptability is taking valid strategy trades without hesitation, even during a trading losing streak.

Adaptability is being able to move from one strategy to another seamlessly. For example, you are trading a consolidation breakout during an uptrend, expecting the price to rise. Instead, the price falls back below the consolidation and stops you out. Immediately after the price rises again. This is a false breakout, and based on the false breakout strategy we know we should be getting back in. While the original trade was a loss, we can’t let it affect us. If conditions are still good and we get another strategy signal we take it. Many (but not all) losing streaks occur because a scared trader ends up skipping the winning trade(s) they would have had by not taking the trade signals immediately after their loss(es).

Adaptability is also being able to see when something could be improved. This should only come with a lot of experience and taking hundreds of trades with a strategy. I make subtle changes to my strategy every so often, because I notice over many trades (I review at the end of the day and at the end of the month) that a small tweak could improve my win-rate, profit-per-trade, etc.. Review your trades regularly. Look for areas of improvement, but don’t tinker unnecessarily.

Alternatives For Conquering the Trading Losing Streak

Instead of just trading through it there’s one suitable alternative. Take a break. Take a few days off and gather yourself (this was briefly discussed above). Make sure you’re sticking to your plan and that the losing streak isn’t a result of deviating from the plan and taking random trades. A few days off once in a while is a good idea.

Eventually though, we have to accept losing, and losing streaks. They do occur, so don’t constantly run away and take a break every time you have a few losers. This won’t do any good either.

Another option is to “wait for the winner.” Say you lost 5 trades in a row. You decide you won’t trade again until your strategy produces a winner. So you don’t take the next trade signal. It could be a loser or a winner. You don’t know. Once a winner occurs (you won’t be in it), then you start trading again. By waiting for the winner you’re waiting until the market starts adhering to your strategy again. Careful with this one. If you use it too often it can create bad habits and reinforce the fear of losing.

If your win-rate is typically higher than 50% (even if you are currently in a losing streak), if you skip a trade your odds of missing a profitable trade are greater than your odds of missing a loser. Don’t be afraid to lose. If you have an edge, exploit it.

If “waiting for a winner” appeals to you, create guidelines and put them in your trading plan. Arbitrarily deciding to skip signals creates a lack of discipline which can easily lead to further deviations of the trading plan and losses.

Final Word on Trading Losing Streaks

Consider the following monthly returns for a swing trading system. Each month has multiple trades in it, so losing months typically mean there was a stretch of losing trades.

Month 1. +9%

2.+12%

3.+7%

4.-6%

5.+11%

6.+13%

7.-8%

8.+5%

9.+15%

Looks decent. What if we changed the order though, and put the two losing months at the beginning? If you had two losing months and then quit you’d never know the potential of the strategy…and the strategy does have great potential! You often need to trade through a couple rough patches to find out though.

If you believe your strategy has a 60% win ratio, think about all the different ways that could be distributed over 100 trades. Theoretically, you could lose your first 40 trades in a row and then win the next 60. Likely the results will be more randomized than that, but when you place tens of thousands of trades over a trading career you’re likely to see statistics play out in seemingly bizarre ways. If you fall into the trap of thinking you need to change your strategy every time you hit a trading losing streak, you’ll never succeed long-term.

Here is something to really mess with your head:

Image a random series of ones and zeroes, 10^1,000,007 digits long (10 to the millionth power). A monster number. According to The Drunkards Walk (Leonard Mlodinow, 174), within this monster number “You should expect at least 10 non-overlapping subsequences of 1 million consecutive zeros.” Considering this is a random string of ones and zeros, “imagine the poor fellow who bumps into one of those strings…”

So it is with trading. Occasionally you’ll bump up against a random string of wins or losses, which are well within probable parameters if you consider hundreds or thousands of trades. Unfortunately, when you’re in a trading losing streak it’s hard to think that way.

Same with buying a strategy or a trading book. If 1000 copies are sold it’s likely at least a few of those traders will run into a nasty string of losses right off the bat (and all traders will at some point) even though the strategies may actually be quite good. Another group of traders may run into a massive winning streak right off the bat.

Trading can be streaky at times. That said, I have been trading since 2005 and wins and losses tend to be alternating, with only small streaks of wins and losses typically. If I start to see longer streaks of losses I am not following my system, or I am not being adaptable.

Trade through. Until you’ve been through a few rough patches you have no idea what you and your system are capable of. And keep the risk on each trade small; even with risking 1% per trade you can still make great returns.