Ever heard someone talking about a big jump in his trading account because he was trading very well recently, and you thought to yourself, “Bah! That’s just luck, nothing to get cocky about!”? Well you’re probably right! Winning streaks are simply an effect of luck, so are losing streaks. These are nothing more than probabilities playing themselves out to you.
Let me explain with the most cliche example in probabilities: The flip of a coin. When flipping a coin, there is a 50% chance of getting either heads or tails. Fair yes? Now imagine flipping the coin 10 times.
How many times could you get heads? It is extremely rare, but it is possible to get 10 heads in 10 flips!
Is it possible to get more than 5 heads over 10 tosses? Yes!
Is it possible to get 5 heads in a row? Yes!
Where am I going with this?
Stay with me just a moment more.
This is over just 10 tosses. Imagine each toss is one trade with a winning probability of 50%. Heads representing a profitable outcome while tails representing a loss.
Over 100 trades, wouldn’t it be possible that you can experience streaks of heads or streaks of tails? These are your winning streaks and losing streaks!
This is what luck is, luck is simply WHEN you experience these streaks. Luck is also how long the streaks last. Over the long run of 100 or 1000 trades, regardless of the win rate of your strategy, you will still experience these winning or losing streaks. (Granted with a higher win rate, your losing streaks will be shorter)
So how can you maximize the effect of luck?
(These are assuming you use a consistent approach to trading and not random entries.)
There really isn’t a lot to do during a winning streak.
- Just by using proper position sizing, trading with a percentage risk of your capital, will enable you to trade larger with each win during the streak. This will compound your profits during the winning streak.
- Keep proper trading journals and find out what you’ve been doing right, keep on doing it.
The more important question is, how can you minimize the damage from losing streaks?
There’s more work to be done here.
- Employ the use of position sizing again. During losing streaks, reduce your risk per trade. If you were risking 2%, be ready to drop it to 1%, then 0.5% if it’s really bad. Slowly bring it back up to 2% again as you regain your confidence in your trades.
- But don’t lose hope, do your homework, find out what’s causing your losing streak. Most people will have a bias to push blame onto the market. “Bad market conditions” or “Stophunted” are common excuses. Look more closely and take responsibility for your trades. If the market conditions are not favourable for your strategy, find a way to identify such conditions in future, so you can avoid trading or reduce size when trading in them. If you’re getting stophunted too often, look at your strategy again, find out if you were too eager to trade, or if your entry needs some refining.
“If you personalize losses, you can’t trade.” – Bruce Kovner