Managing a Losing Streak

Every strategy that has ever worked has also had a run of losses. A method that wins half its trades will produce six or seven losses in a row at some point in a year of trading, by chance alone. The streak is not the problem. The decisions made during it are.

What a streak does to a trader

The first few losses are tolerable. Then the doubts begin: the method is broken, the market has changed, something must be fixed. At that point most traders do one of three things, and all three make it worse: they increase size to win it back, they change the method mid-stream, or they stop following the plan and start trading on feeling.

Rules written in advance

The only reliable defence is a set of rules written while calm:

• A daily loss limit, after which no new trades are taken that day
• A weekly loss limit, after which size is halved until the week turns
• A maximum number of consecutive losses, after which trading stops until a review is done
• A rule that size can only be restored gradually, not in one step

These rules remove the decision from the moment of pain, which is when judgement is worst.

Reviewing without panic

When the streak reaches the review point, go to the journal. Sort the losing trades. Ask three questions. Did the trades follow the plan? Were the market conditions the ones the method was built for? Is the loss within the range that the method has produced before? If the answers are yes, yes and yes, nothing is broken; the streak is noise and the method should continue at reduced size. If the trades did not follow the plan, the problem is discipline, not the method. If the conditions changed, the method may need a filter, not a rewrite.

Returning to normal

Restore size in steps, each after a few trades that follow the plan, regardless of whether they win. Confidence should return with process, not with profit. A winning trade taken against the plan during a streak is the most dangerous outcome of all, because it rewards the wrong behaviour.

Strategists have streaks too. A drawdown in a copied strategy is a reason to check that the strategist is following their published rules, not a reason to leave the moment it hurts.

What to watch

Watch the length of the current streak against the longest in your records, the share of trades following the plan during the streak, and your position size. If size is rising while results are falling, stop.