Losing Streaks (15
One of the toughest experiences for any trader, pro or amateur,
is to go through a losing streak. Unfortunately, it is going
to happen to every trader at some time. It may financially
ruin you and psychologically break you. It may put out of
the trading game forever.
Trust me, it will happen to you. It has happened to me.
How you deal with it will probably determine your eventual
success as a trader.
One of my techniques for testing the success of a mechanical
trading system is to use a Monte Carlo simulation. I take
the price history of every futures contract that I want
to test the system on and use statistics to describe that
price series. I use the statistical description and a random
number generator to create a price series for that commodity
that is of infinite length.
I can then use that infinite price series to test mechanical
systems. I can effectively test the system over, say, 100
years instead of just the recent past of the commodity.
What I found is that ALL trading systems will go broke eventually.
There is always an amazing series of events that occurs
that will cause every system to go broke. Conversely, ALL
systems go through periods where they knock the ball out
of the park. The point is that almost anything can happen
over the long run. You WILL go through a losing streak if
you trade long enough.
The first thing you will feel is doubt about yourself as
a person and in your techniques. You will start to flinch
when you put on a trade. You might start to not put on trades
that you really should put on.
Here's what you need to do when dealing with a losing streak:
1. Move to a smaller bet size.
2. Examine the recent track record to ensure that it is
within normal expectations.
3. Examine your psychology
Move to a smaller bet size
First, you need to cut the loses but still retain your self
discipline. The way to do this is to continue to trade as
your always have but to cut back on the size of your positions.
For example, you may be trading 10 contracts normally. Now
is the time to cut back to 5 or even 1 contracts while you
examine the current situation.
This tactic will immediately cut your losses if the losing
continues. You will have dramatically cut your losses if
there is something wrong with your techniques. Don't forget
the first rule of speculation: cut your losses and let your
Additionally, the psychological pressure will ease off as
you are now trading for a peanut rather than a mound of
Second, you need to examine if the current track record
is unexpected or expected. To do this, you need to keep
track of your past track record and/or of the theoretical
track record of your system. Is the current bad streak within
the historical record?
If yes, then you simply must grit it out and ramp up your
trading to normal or somewhat below normal levels. If things
are normal then you must assume that your techniques are
still working no matter how painful it feels to be losing
If the current losing streak is outside the historical record,
then you have a real problem. Now you must brutally re-examine
the basics of your technique. Are you doing something different
than in the past? Did you add a new twist to your old techniques?
Are market conditions different than in the past?
Obviously, the answer to these types of questions are critical.
If you have changed the system, then switch back! If market
conditions have changed, will they change back? If yes,
then keep trading but at a low bet size. If not, then stop
Presumably, you had been making money in the past. That
means you had an edge in the market. Let me quote the CEO
of John Henry & Co in their latest monthly newsletter
(http://www.jwh.com/NewsLiterature.asp?CAT_ID=1 ). John
Henry is one of the most successful and disciplined of the
systems traders. They are currently going through a bad
"Jake: What's a tough guy?
Michael: I don't know.
Jake: A guy with an edge. What makes him sing better than
me? Something in here. What makes it loud? A microphone.
That's his edge.
Jake: A gun, a nightstick or a razor. Something the other
guy ain't got. An extra reach on a punch, instead of brass
knuckles, a stripe on a sleeve...a badge that says 'cop'
on it, a rock in your hand...or a bankroll in your pocket.
That's an edge, brother. Without an edge, there ain't no
"Orson Welles could have been speaking about hedge
funds, CTAs or managed futures - with that piece of dia-
logue from 'The Lady from Shanghai'. We are no tough guy,
yet when there is a period of poor performance, there could
be the belief that a manager has lost his edge. We have
not lost our edge because it is instilled in our behavior.
Our edge is simple. We stick to our discipline and stay
focused. Many times during a drawdown man- agers will switch
models and style in order to capture the current market
behavior. We stick with our systems and follow the trend.
We know that there will be periods of choppy and sideways
performance. It is part of market behavior and has to be
minimized; however, we also believe that trends will be
created by the natural ebb and flow of markets. We have
made portfolio adjustments to account for changing correlations
and market liquidity. We have also changed allocations across
models in an attempt to minimize downside, but we have continued
to maintain our quantitative style that depends on trends.
It is not an edge based on believing that we are smarter
than the rest of the market, but on the idea that focus
will allow us to be placed in a position to attract the
most out of market displacements when they do occur."
Mark S. Rzepczynski
Ph.D. President and Chief Investment Officer
John W. Henry and Co."
Mr. Rzepczynski makes a key point here that affects both
your trading and your psychology of trading.
The key to not letting your psychology get affected is to
not tie your ego into the trading performance. Instead,
focus on this as a learning experience. Try to look at every
trade and the current losing streak as an eduction. After
all, your losing streak is just the tuition for you to become
a better trader.
Stop thinking about the money you are losing and start thinking
about what you are learning. The more you think about learning
and the less you think about your ego or the money you are
losing, the sooner you will get back to winning.
The bottom line is that everyone goes through losing streaks.
Get used to it. The key is to retain your psychological
equilibrium so that you can objectively examine your trading
to make sure that it is sound or not sound.