The Trading Guide Part 2-Limiting Losing Streaks

Screen Shot 2019-02-13 at 16.52.20.png

If you are new to trading there are a few simple rules you can follow that will greatly increase the likelihood of surviving and succeeding.

 

Our first rule was around daily loss limits. Our second rule is that you should stop trading for the day after losing 3 times in a row.


Even the most successful traders lose some trades. The goal isn’t to avoid losing-it’s a natural part of the trading journey, and as long as the profits on the winning trades outweigh the losses on the losing trades you will still be successful. Instead, you should be focusing on how you handle a loss.

 

Losing €10 is a lot more painful than the joy of gaining €10

Losing €10 is a lot more painful than the joy of gaining €10

The fact is, most people react irrationally and emotionally to losses. It’s a behaviour that is programmed in almost all human beings, and it’s due to the impact of a loss being stronger than that of a win.

In fact, our brain processes losses as 2.5 more painful than the gains made from winning.

We delve deeper into the behavioural economics of losing here.

Let’s say we start the day with a couple of successful trades. It’s a good feeling ,isn’t it?

Over the rest of the day, however, things don’t go according to plan and we now have 3 losing trades in a row.

 

We have two options here: we can call it a day, relax and come back tomorrow emotionally fresh, or, we can take revenge on the market by ignoring our trading plan and make one or more reckless trades with position sizes too large for our account.

 

Trading just after a losing streak, often results in poor performance, because we’re acting emotionally and irrationally.

 

Over time you will learn to understand how your losing streaks affect your behaviour by measuring the performance of these trades. For now, practice recognising and acknowledging these emotions when they occur. Give them a name if it helps, and ensure that you are making realistic and informed trading decisions.

 

Over time you can measure the impact of the emotions, but for now we recommend to simply start with a limit of 3 consecutive losses.

 

Just like the other Guardrails, this exists to protect your account and gives you a chance to calmly assess your strategies, and return to trade the next day.

 

To recap:

  • Accept the fact that you will have losing trades and losing streaks.

  • Learn to recognise your negative emotional state during a losing streak.

  • Stop trading after 3 consecutive losing trades in one day.

Marise Gaughan