Whether in articles, on trading forums, or various blogs, losing at trading is not a concept discussed as much as winning for an obvious reason; no writer or poster wants to come across as negative, or wants to damage the optimism that envelopes the whole retail trading market. Ego also gets in the way as the whole industry has grown inside a culture of “can-do”; selling dreams to the inexperienced and gullible, therefore discussing losers is often a no-no.
Discussing a series of losers is an anathema in an industry that is all about winning, confessing to losing streaks that can enter double figures can often be regarded as the ultimate taboo. But experiencing a losing streak (that can last into double figures) is an entirely natural occurrence, particularly when trading off the lower time frames, whilst perhaps employing a ‘fire and forget’ strategy looking for returns (R:R) of 1:1.
So how do we judge if our ‘double figure’ losing strategy is acceptable and that we’re not deviating from what would be considered an acceptable, random, organic distribution of losers and winners? Is there a metric that we can use in order to gauge how far our losing streak has deviated from the ‘norm’, or is it (losing several trades in series) a highly personal experience depending on the strategy employed?
Trading off lower time frames increases the likelihood of clusters of losses
Without a doubt, the lower down the time frames a trader operates on, the greater likelihood that they’ll experience several losers in quick series is enhanced. If a swing trader were to lose perhaps ten trades in series, spread over a period of a month or two, and many (or most) of those losers were close to their maximum risk per trade, then our swing trader would rapidly begin to doubt their overall strategy. In fact it’s fair to say that they’d be very unlikely to allow ten swing trades in series to be losers before ending their current strategy early and re-evaluating it. Two or three consecutive losers for a swing trader (on one security) close to their stop should set alarm bells ringing that the method part of the overall strategy needs fixing, or completely abandoning. But on a lower time frame that observation and condemnation doesn’t fit.
Ten losers in series, when trading off lower time frames is not as rare as many would think.
For those operating fire and forget strategies, operating on or around the zones of: support, resistance and the daily pivot lines, ten quick losers in succession isn’t rare, unless the full risk is lost on each trade. Similarly traders trading off 5 minute time-frames could easily experience such a series of consecutive losses. For example, if our trader was aiming for 20 pips gain on EUR/USD and risking 20 pips by way of a fixed stop and our trader lost 200 pips in series – the full risk per trade, then it would be right to call the strategy into question as in most analysts’ and experienced traders’ viewpoints this type of losing streak is unusual, the thought would be that the method is all wrong.
However, if our trader lost ten trades in series, whilst trading the plan after planning the trades and the losses were less, with many trades only losing a couple of pips, then the trader may feel justified in continuing with the current trading method. If our trader is employing the use of trailing stops then several winning trades may in fact turn into very small losses of a couple of pips and or several break even trades, therefore the method shouldn’t be called into question, our trader should stick to the plan and work through the pain of the current losses.
Coping psychologically with a long series of losing trades
Hopefully we’ve already identified the times when our trader should stick with their trading method as part of their plan and when to abort that method, but how to cope with a series of deep losses in series can prove to be tricky on our trader’s psyche. However, conducting a quick check-list vis a vis the trading plan can identify if the losses are in keeping with a normal random distribution of wins and losses, or are they an ‘outlier’ result caused by our trader’s poor methodology.
Our trader needs to ask themselves a crucial question; “has the series of losses still kept within the trading plan?” For example, if our trader was risking 0.5% account size per trade in the examples we’ve used earlier, of the 20 pip loss or gain 1:1 trading method that we described, then a series of losses at full risk would see our trader lose 5% of their account balance. Given the nature of low time frame trading that loss could be incurred in a single day as it’s not unusual to take ten trades over two sessions in a trading day. This would almost certainly flag up that there is an issue with the trading method of the plan.
Our trader may have built into their trading plan a ‘circuit breaker’; they’d not tolerate losses of perhaps 2% per day without stopping trading on that day in order to allow them the opportunity to psychologically recover from the losses. Our trader may have extended that circuit break straddling over two days; losses of two percent account balance on consecutive days, 4% total, could be the point at which the current strategy is abandoned.
However, in the series of ten losses, if there is a fairly random breakdown and distribution of the losses, then our trader may have not experienced the full risk loss of 20 pips on each of the ten losses. For example; they may have lost 4 trades close to break even, two actually break even and four losses. But even those losses may not be at the full 20 pip loss each time as a trailing stop, dynamic or otherwise helped limit the losses considerably. Therefore they’ve perhaps only lost 60 pips as opposed to a full 200 pips and a loss of 1.5% account size versus 5% is a significant difference.
Never overlook risk, position size and money management
So, as we’ve clearly demonstrated it’s not just the actual method that’s important in judging whether or not our low time frame trading method, or fire and forget ‘levels’ trading method is working according to plan, money management/risk/position sizing is (as always) equally important.
As we’ve clearly demonstrated with the effective use of stops and only risking a modest amount per trade, our trader’s losses can be kept to a minimum. This also delivers the indirect benefit of allowing our trader to decide if the method still needs changing over a much longer series of trades, even if that method did incur a maximum number of losers. For example if sticking to a 5% loss tolerance before changing methods, in order to definitively determine if the method is wrong, our trader could perhaps experience thirty losing trades over a thirty trade period, and without a doubt the longer the trade evaluation time period the better our trader can judge his current method.
