Lessons › Trading psychology and process › Handling a losing streak

World 9 · Trading psychology and process · lesson 11 · level 4

Handling a losing streak

Losing streaks happen to every trader, so have a plan for them before they arrive.

In one line

A method that wins half its trades has about an 8 in 10 chance of five losses in a row somewhere in 100 trades. Is your plan ready?

Explained simply

Flip a fair coin 100 times and you will probably see five tails in a row at some point. Trading streaks work the same way, even with a good method. A streak plan is like a storm plan: you decide what to do while the sky is clear.

The lesson

Even a solid method has runs of several losses in a row; at a 50% win rate, a streak of five or more losses shows up somewhere in 100 trades about 81% of the time. A streak plan can include cutting size after a set number of losses, taking a break and checking the journal. The key question is whether you broke your rules, whether the market changed, or whether it was normal bad luck. Changing strategy after every short streak means you never learn whether the method worked.

A worked example

Illustrative example: a 10,000 dollar account risks 100 dollars per trade and hits 5 losses in a row. Trader A follows a streak plan and halves the risk after 3 losses: 3 x 100 + 2 x 50 = 400 dollars lost, or 400 x 100 / 10,000 = 4% of the account. Trader B doubles the risk after each loss: 100 + 200 + 400 + 800 + 1,600 = 3,100 dollars lost, or 3,100 x 100 / 10,000 = 31%. For a method that loses 60% of its trades, the chance of losing the next 5 in a row is 0.6 x 0.6 x 0.6 x 0.6 x 0.6 = 0.07776, about 7.8%, so streaks like this will come.

The same idea at four levels

1. Beginner. Losing streaks happen to every trader, even with a good method.
2. Foundation. Plan ahead: for example, after 3 losses in a row cut your size in half, and after 5 stop and review.
3. Intermediate. In the review, sort the streak into rule-breaking, a changed market or normal variance.
4. Advanced. Compare the streak with what your win rate predicts: if 60% of trades lose, three losses in a row happen about 22% of the time on any three trades, so a short streak alone proves little.
5. Expert. Size so your worst likely streak is survivable, cut size during a streak as a brake, and restore full size only after a set number of rule-following trades, not after one win.

Mistakes to avoid

• Changing strategy after every short losing streak.
• Increasing size to end the streak faster.
• Going back to full size after a single win instead of following the plan.

Goal of this lesson: Respond to a losing streak with a plan instead of panic.