How to handle winning and losing streaks

One of the most challenging parts of becoming a trader is to find the right mind set to be successful. Losing streaks and even winning streaks can be very stressful periods of trading that test your psychological ability to become a good trader.

To master winning and losing streaks successfully, you have to plan for them in advance. This article will take you through this planning phase and help you decide what to do after a winning or losing streak.

The danger of winning and losing streaks

Imagine you just went through a losing streak. In a short period of time you lost 50 percent of your total equity. This means, you have to double the money you have left just to get back to where you were. An experience like this makes many traders more cautious. They add more elements to their strategy to reduce the percentage of losing trades or start questioning their entire strategy. Since they just lost a lot of money, however, starting to become more cautious will make winning their losses back even harder.

On the other hand, if you just went through a winning streak and doubled your equity, what do you do? Many traders adjust their money management, thinking that since they have a bigger cushion now, they can afford to take a little more risk.

If they double the percentage they invest, however, they are in for a surprise: Since every winning streak will eventually be followed by a losing streak, the increased percentage will make them not only lose what they just won, but even more. Now that they have a smaller cushion, they reduce the percentage they are willing to invest again and have a hard time to win the lost money back.

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How to handle winning and losing streaks better

As you can see from these examples, managing winning or losing streaks is not as easy as it might appear at first sight. In general, traders make two critical mistakes when managing losing and winning streaks:

1. They abandon their money management strategy

Many traders feel the need to adjust their money management strategy because they had bad money management in the first place. They were either investing too much, and now realize that staying with this strategy will ruin them, or they invested too little, and now realize that this strategy will not get them anywhere.

If you have a good money management strategy, however, you can stick with it through even the worst losing streak and the best winning streak. Invest a fixed percentage of your total equity, and you will automatically adjust your investment per trade to fit your financial abilities.

2. They abandon their trading strategy

Sometimes, a losing streak convinces a trader that his strategy is poorly designed and needs to be adjusted. This, however, is only a reflection of a much bigger problem: Obviously the trader did not have much faith in his strategy from the start. If the trader had designed his strategy carefully, he’d know that the losing streak is only temporary and that his strategy will take him back to where he was.

The same goes for traders abandoning their strategy after a winning streak: If they had planned their strategy well, why should they abandon the instrument that got them to where they are? Traders investing in more opportunities or cutting elements from their strategy only prove they had not planned their strategy.

Preparation is key to success

Both of these mistakes can be fixed by understanding that winning and losing streaks are inevitable. They are neither a sign of good nor bad trading; they are simply the consequence of mathematical odds.

Take the time to prepare for these events by carefully designing a trading strategy and a money management strategy that you believe in and feel confident about. If you win or lose big, this will help you believe in the strategy and stick with it. Just like in the market, highs and lows are inevitable. Still, your equity should resemble an upwards trend. The only way to achieve this constant improvement is to plan your strategies carefully and then stick with them.