5 Steps to Surviving Losing Streaks in Active Trading

By Galen Woods ‐ 6 min read

Every trading strategy comes with a losing streak. If you want to stay in the game, you need to survive your losing streaks.

A trade. A loss. A losing streak.

Consecutive losses bring out the worst behavior of a trader.

After a losing streak, your confidence suffers and you’re no longer in the right state of mind to trade. The series of trading losses also hints at a possibly diminishing trading edge. You get worried.

Losing streaks have the potential to start a downwards spiral in your trading career.

For this reason, you need to anticipate losing streaks and deal with them the right way. In a matter of time, you will learn that surviving losing streaks is an essential skill for all active traders.

I’ve experienced countless losing streaks. It eats into you and bores a hole in your confidence. It drives you into a senseless state, until you learn how to react.

I’ve learnt that the right reaction to losing streaks is critical. It will prevent catastrophic losses, preserve profits, and maintain confidence.

Let’s take a look at this step-by-step guide that’ll help you survive your next losing streak:

Step 1 - Correct your expectations of losing streaks

There will be losing streaks.

You will have losing streaks.

You will always have losing streaks.

I cannot emphasize this enough. You need to expect losing streaks, even in a wildly profitable trading strategy.

First, you need to accept that losing streaks are inevitable.

Then, you need to find out the length of losing streaks you expect with your trading strategy.

How many consecutive losses are within the expectations of your trading strategy?

The length of expected losing streak depends on the type of strategy. For instance, trend-following strategies suffer longer losing streaks than a high-frequency scalping method.

Of course, the best way to find out is to back-test your strategy. Then, run simulations to predict the worst losing streak.

Let’s say your simulations show a maximum of eight consecutive losses. In that case, you should get worried when you have a losing streak of ten trades.

But there’s no cause for concern if you’ve suffered only three consecutive losses.

The maximum consecutive losses that your strategy expects is the all-important number. With this benchmark number, you are able to react to losing streaks rationally.

Step 2 - Set up emotion-based limits

Setting a daily stop-loss amount or a limit on the number of trades are common ways to deal with losing streaks.

While these practices make good sense, you can refine them by relating them to your emotions.

You’ve calculated the expected longest losing streak in the first step. You ought to be prepared for that.

In the ideal scenario, you know that your strategy might encounter eight consecutive losses. You’ve suffered three consecutive losses. So you should stay calm and trade on.

But a trader’s reality is different.

Three consecutive losses might be enough to mess with your mind. When you get a losing streak and emotions flare, objective thinking flies out of the window. Your emotions take over, you over-trade, and your trading capital is gone.

This is why you should figure out your emotional triggers.

Don’t just set an arbitrary daily stop-loss amount. Ask yourself how much money can you lose in one session and still stay unemotional?

The answer is different for everyone. It depends on your risk profile and how much money you have.

Similarly, don’t just decide to stop after an arbitrary number of losses. Think about how many consecutive losses does it take to cause your emotions to run amok?

Remember to compare this figure to the longest losing streak you expect. Use the lower number as your circuit breaker. This is because even if you are not bothered by the losses, a long losing streak might imply trouble with your strategy.

Step 3 - Trade smaller. Not bigger.

You should complete the first two steps before your next losing streak.

This third step comes into play when you get a losing streak. It is a critical step if you don’t want to be ruined by your losing streaks.

How do losing streaks kill traders?

The more a trader loses, the more he feels tempted to earn back what he lost. To do that, he increases his trading size to earn more. Of course, the risk is higher too.

And when the trade goes wrong, the trading account is gone.

This is why when you are experiencing a losing streak, never increase your position size. Instead, do the reverse.

Cut your size (to zero if necessary). Cut your risk. Regain your composure. Trade better.

Step 4 - Take your mind off trading

Cutting your position size might save you financially. But your mind might need help too.

After a series of losses, you will feel disillusioned about your trading ability. You will start to doubt if your trading system works, or if it’s even possible to make a living from trading. Your confidence is damaged. If you are really serious about trading for a living, it might even feel like your life is over.

No one should trade with that state of mind.

Take time off the markets. Spend your time on activities beyond trading. Realize that your life is more than trading. Think positive. Stay gritty.

Once you feel well and prepared to take the plunge again, go on to the next step.

Step 5 - Figure out if the problem lies with your trading approach

In the previous step, you took time away from the market. That helped to reboot your perspective. It allowed you to detach yourself from the losing streak.

After you get back into a clear state of mind, you can start analyzing what really happened.

Is a losing streak of that length expected from your trading system? (Refer to the benchmark you established in the first step.)

If the losing streak is within your strategy’s limits, resist tweaking it.

Suffering a losing streak makes you feel that something must be wrong. And that you must do something to prevent it from happening again. But that is not always the case.

This is why you need to find out the causes of the losing streak after a break. Once you’ve detached yourself from your losses, you can then review your trading system objectively.

Remember that losing trades are not always bad trades.

If the losing streak is beyond what your strategy should encounter, it might hint at a problem.

In that case, you need to study your trades in detail and find out the problem. While this is not an easy task, it is preferable to staying with a trading system that has lost its edge.

After you’ve found the problem, work at improving your trading strategy. Dive back into trading only after you’ve refined your approach.

Conclusion

I know that surviving a losing streak is not easy. You’ll have to spend a lot of time and emotional energy if you want to make it work.

My experience has taught me that losing streaks push you further on the path of consistency. That is if you survive them.

You’ll have a hard time dealing with losing streaks, regardless of how you trade. Thinking that you can handle losing streaks without having a plan for them is not wise.

Instead, stick to the steps I’ve described above. Adapt them into your trading plan.

We are after the profits. But first, let’s survive the losses to get there.