Whether you are trading a strategy with a low winning percentage and big winners or a strategy with a high winning percentage and small winners, both of those strategies are going to encounter losing streaks.
The former strategy will experience those losing streaks in the form of a long string of losses, while the latter strategy will more likely experience a few large losses. Regardless of the strategy, every trader is going to be forced to deal with losses. Having a plan in place to deal with those losses is a great way to make sure that they don’t break you.
An article that was published on Forex Crunch this week took an interesting look at How to Handle a Run of Losses. The article explains that losses are simply part of the game when trading Forex. Every trading strategy is going to experience losing periods, and every successful trader has to learn how to deal with those losses.
Triumph & Disaster
The article starts with the following quote from Rudyard Kipling:
“If you can meet with Triumph and Disaster / and treat those two impostors just the same”
The article explains that the goal for every trader should be to treat winning and losing streaks both exactly the same. A simpler way to illustrate the same point is that traders cannot let the highs get them too high or the lows get them too low.
Because losses are an expected part of any Forex strategy, traders should have a plan in place to deal with losing periods. According to the Forex Crunch article, that plan should have two different parts. The first part should analyze the system, and the second part should analyze the trader.
Analyzing the System
Losing periods are when traders are most likely to question the validity of their strategy. For this reason, this is a great time for traders to remind themselves of the reasons that they chose a particular strategy and the backtesting evidence that supports it.
The Forex Crunch article recommends breaking down all of the recent trades to determine if anything is wrong with the strategy or the execution. It can also be helpful to compare your results to the expected results that your backtesting suggests. Where does your current losing streak fit in terms of other losing streaks that your backtesting shows?
Analyzing the Trader
The article also suggests that traders who are experiencing losing streaks should perform a thorough self analysis. Losing money has the power to upset the emotions of even the best traders. This is a good time for a trader to honestly assess if they are following their strategy the way it was designed.
The article makes a good point that anyone can be a trader when their strategy is winning. It is the ability to keep their emotions in check during the difficult periods that makes truly great traders. One of the best ways to make sure that you are able to keep your emotions under control during losing streaks is to have a plan for how to handle them.