How to Bounce Back After a Losing Streak
So, how do you bounce back after a losing streak?
As a trader, it is impossible to win all the time.
In fact, probabilities are in favour of you losing your money rather than winning. Therefore money management or the way you handle losing streaks is critical.
The problem with it comes from the desire to make up for the loss. Not only that traders want to get back to where their P/L was before as quick as possible, but also to make some extra bucks on top of their losses.
Losing Streaks and Bouncing Back After Them
Trading consists of winning streaks, as much as of losing streaks and thus bouncing back after them.
No pain, no gain, as the saying goes 🙂
A losing streak is much more damaging to your trading account than just a single loss.
The biggest problem with losing streaks is that a trader’s confidence is shaken and during those times you are vulnerable to making the classic “rookie” mistakes.
Overtrading, over-leveraging to name a few, fit into this category.
Traders suffering a losing streak face the same pitfalls as people having some downtime in their personal lives. If there’s a way to recover from, let’s say, breaking up with your girlfriend, there must be a way to show how to bounce back after a losing streak.
Take a Break From Trading
Exhaustion is the number one cause for errors when trading the currency market. Some strategies require extreme concentration and focus, and when the markets move too fast, errors might occur.
For those thinking only at the missed opportunities when taking a break, just remember that the markets will open tomorrow, next week and next month with or without you.
There’s no one hunting your stop-loss orders, and there are no hard feelings involved…simply your strategy needs improvement, or something else is missing (e.g., availability, funds, etc.).
A break is a good thing both for your trading account as well as for your mind. The best ideas come from a rested mind and soul and the chances to bounce back after a losing streak increase after a short break.
Increase the Risk-Reward Ratios in Order to Bounce Back After a Losing Streak
A money management tool, risk-reward ratios exist to bring discipline to any trading strategy. They are especially helpful when traders look to bounce back after a losing streak as by merely increasing the take profit level.
Higher risk-reward ratios offer the luxury of having losing streaks and the account not suffering much from them.
Look for risk-reward ratios in the vicinity of at least 1:3 to provide a good balance between the winning and losing sides of a strategy, while at the same time letting your trading account grow.
Higher risk-reward ratios are possible too, but they do not appear that often when trading the currency markets. Nevertheless, the higher, the better, so striving to improve these ratios is key to coping with a losing streak.
Draw a New Trading Plan and Set Realistic Goals
There is a saying stating that the “devil hides is in the details.” This is so true in Forex trading, especially when trying to bounce back after a losing streak!
Sometimes the slightest change in a trading strategy or plan leads to exponentially increasing your winning odds.
Thus, a losing streak is the perfect occasion to revisit the trading strategy and look for improvements.
Here are some areas to consider when re-visiting your trading plan:
- Increase the time dedicated to trading in order to avoid long losing streaks
- Some traders use a couple of hours after the day job to try to make the same amount (or more!) than they make working eight hours on the regular job. Needless to say, that’s unrealistic and on the long run will only affect the trading account by causing massive drawdowns. To fix this, try to dedicate more time to analysing, even if that means putting some screen hours over the weekend and building a trading plan for the week ahead.
- Use pending orders more often to bounce back after a losing streak
- Only because the markets are open is not a good enough reason to trade. Wait for the price to hit your level. Using pending orders is a great way to test a strategy, build up your confidence and stay disciplined. Sometimes the best trades are the ones missed, and pending orders can avoid useless exposure when the market doesn’t move.
- Risk only one percent of your equity on each trade to bounce back faster
- Overtrading is one of the reasons why traders lose money. Using the right percentages, on the other hand, is a great way for reducing overtrading. The challenge here is in finding a way to convert the one percent of the equity of a trading account into the volume to use on the next trade. To fix this, use the pip distance needed for the stop-loss and convert it to the right monetary value to find the right volume that will only expose your account to a maximum of 1% loss.
Not All Losing Streaks Are Meant to Be Bounced Back After
It may sound strange, but trading is not for everyone. It is hard work, it requires dedication and passion, and takes a lot of time to master- possibly 10,000 hours or more!
Using the one percent rule explained earlier lets the trading account grow at a realistic pace. But more importantly, it prevents the trader from losing all the funds in his/her trading account.
While it is easy to look at improvements in the trading strategy as a way to bounce back after a losing streak, some losing streaks do tell a different story.
For instance, a massive losing streak of seventy-two consecutive trades will only halve the funds in the trading account, using the one percent/trade rule.
But then again, if the trader had such a long losing streak and was able to lose seventy-two times in a row, means that maybe trading is not suitable for him/her.
Such a negative performance suggests the trader needs to learn more about markets, what makes them moves, money management, trading theories, technical and fundamental analysis, market participants, central banks and monetary policy, and so on.
In other words, he/she needs to dive into the trading world a bit deeper to grasp what are the challenges when trading the currency market.
Wise people take the remaining funds in the account and invest in something else: personal improvement, trading education, or just focus on a different area other than trading.
Some Closing Words
Bouncing back after a losing streak is like facing challenges in our lifetime.
The same happens with our trading accounts. Our trading strategies will go through periods of drawdowns.
Strong performance periods are rewarding but drawdowns are a way to keep score.
Not only the performance matters but how you will achieve it matters even more!
For instance, assume a trading account doubles in a six-month period, which is an excellent performance by all measures.
However, if it reached this level with an absolute drawdown of over thirty percent, few investors will consider the strategy a viable one.
Therefore, performance accompanied by little or no drawdown indicates strong money management skills.
On the other side, strong money management leads to drastic improvement of the trading results, thus providing a great way to bounce back after a losing streak.
To sum up, any psychological bounce after a losing streak is more challenging to achieve than a simple winning streak.
One winning streak is not enough to build the confidence to such levels that heal the psychological wound of being wrong in trading.
However, tightening the money management rules and following them strictly will immediately result in a better overall performance.
That, in time, will lead to confidence building up slowly but surely and the trader getting into the right mindset when facing the currency market.
Check out my article about 5 strategies that follow the trend HERE