Five steps to surviving losing streaks in day trading

Successful day traders are those who learn from losing streaks and adjust their strategy.

It is said that even the best traders suffer losing streaks just like the best of batsmen have lean patches in cricket. Successful day traders, in the long run, are not those who always get their trades right. There cannot be too many of them. What matters is how well they manage to survive and salvage their position out of such losing streaks. Better still, are the traders who use the losing streaks to unlearn past trading mistakes and use the insights to their advantage.

The problem with losing streaks is that their impact is both financial and psychological. They trigger knee-jerk reactions in traders and can push them into destructive trades, such as overtrading and trying to recover losses by aggressive trading. Such an emotional response often makes matters worse, instead of improving the situation.

Here are some useful tips for dealing with losing streaks.

1. Accept losing streaks as a normal trading risk

It is like any other business risk. Trading is as much about managing your risk as it is about trading correctly. This means you must have a clear distinction between the risks you can control and the risks you cannot. Most macro risks are beyond your control, but you certainly have control over how you tweak your strategy in response to such risks. The type of strategy used by a trader also determines the length of a losing streak. For instance, traders using trend-following strategies tend to experience longer losing streaks as compared to those using a high-frequency scalping method. While you cannot avoid such risks, you can mitigate such risks by back-testing your strategy. This will show you how long the losing streaks could last. But the most important part of trading is to accept losing streaks as a normal business risk for a trader.

2. Define limits that are financial and emotion-based

Most traders are familiar with stop losses in trading, but you need to go a few steps further. For example, you must define the total loss you are willing to take per day or per week and then how much of your core capital you are willing to deplete. If a losing streak results in a breach of these limits, just pause trading, get back to the drawing board and rethink your trading strategy. In most cases, that should work. Don’t ignore emotional aspects. If you have the financial capacity to take 25% capital depletion but psychologically you are only comfortable with 20%, then stop at 20%.

3. When in a losing streak, trade smaller positions

They say when the going gets tough, the tough get going. However, in trading, discretion should always get priority over valour. If you find yourself in the midst of a losing streak, don’t be impulsive and take bigger positions. That may have worked when things were going in your favour. Giving into the temptation to trade big in a losing streak and recoup losses is usually counterproductive. When you are experiencing a losing streak, never increase your position size. Instead, trade small positions.

4. If you are demoralized by losing streaks, take a break and seek support

There is nothing wrong in seeking support when you are demoralized. Instead of doubting your own skills as a trader, talk to the experts. Read up how renowned investors like Peter Lynch, Carl Icahn, George Soros and Ray Dalio came out of their losing streaks. They have all been through such streaks. Consider taking a break from trading and engage in activities that recharge your spirits. It’s important to stay mentally and emotionally positive. You can come back to trading when you are confident about making the right trades.

5. Reassess your approach, and change it if needed

This is hard to accept but as a trader, you need to be flexible. One way is to maintain a trader scrapbook, wherein at the end of each day, you record your trades and your thoughts on the trade. This is extremely useful in giving hints about where your approach is going wrong. Losing streaks are not always bad trades. You are probably trying to outsmart the market. There could be a subtle shift in the market undertone, which you may have missed. The reasons could be numerous. Once you identify them, start working on resolving them.

To sum it up, losing streaks in trading are common and happen to the best of traders. Just get your approach right, evaluate dispassionately and change tack. Just don’t let your confidence dip!

Disclaimer: Investments in the securities market are subject to market risk, please read all the related documents before investing.

The above article is purely academic in nature to educate about basic trading concepts. It should not be construed as an opinion or advice for investing or trading.