Handling strings of losses

I got a good question in my inbox yesterday from a reader, Dave:

Last month I made almost 2% (which is great), but this month I’ve already lost 5% (which is not so great). Every trade I have taken this month has beaten me silly. The losses in money do not bother me that much, but let me tell you what does. I work for corporate America and my job is extremely stressful. I know my days in this job are numbered. Hopefully I can stay employed for 3-5 years, and then I want to trade for a living. Every fiber of my being and every goal I have centers around trading for a living. So when I lose I feel that I will never make it or never make my goal in trading, and this is what really bothers me.

What can I do about this? Any solutions or suggestions to deal with this without emotion would be appreciated. I heard a saying once–focus on being a craftsman not a success story–but this is very hard to do when y you’re losing.

First of all, let me tell you I understand this completely. Anyone who trades will go through some dark periods, and I can remember them well. Some of those most hopeless and despondent points in my life came at low points in my trading career. The connections flow both ways: your life can make your trading worse and your trading can definitely have an effect on your life. I could literally write a 300 page book in response to your question, but let me see if I can get the important stuff in a single page.

Reasons for strings of losses

Let’s put the emotion aside for now and think about reasons why you might have had strings of losses. In your case, I know you’re a stock trader, so I strongly suspect you’re dealing with correlations in a difficult market. We’ve had a nasty turn in the markets as I write this, but you might have been justified in being more aggressive a few weeks ago. With stocks, if we’re more aggressive (either through taking more or larger positions), there’s a chance those trades won’t work and a chance we’ll have a string of losses. If you’re long a bunch of stocks and the market goes down, you will likely have a bunch of losses, but that’s really only one market call that was wrong.

To generalize even further, all trading systems have strings of wins and losses. It’s not at all uncommon to have four or five (or more) losers in a row. As I said above, if you’re a stock trader they may come all at the same time. So, this streakiness is simply a natural element of any trading methodology. This is why we have drawdowns and flat periods, and you must be prepared for it intellectually.

Dealing with trading pain

So that’s the intellectual side, but it doesn’t solve the problem. Even if we know something to be true, we can still feel many emotions in response to losses: shame, hopelessness, anger, frustration–all of these are normal responses to stresses in trading and investing. Part of the challenge of trading is developing the self-awareness to know where you are emotionally. If you’re in a bad place, these emotions can influence your decisions. Traders typically go into “revenge trading” mode, go on tilt, and take reckless risks out of frustration. When they lose on these trades, it’s easy to spiral into a more emotional state and do even more reckless things. This is how you can destroy a trading career in a few hours, so don’t do it.

Conversely, maybe you’re so beaten down you can’t make any decisions. Maybe you’re afraid to pull the trigger. Maybe you feel it’s all so hopeless you should put the money in your trading account to some better use, or maybe you think of all the good things you could have done for your family with the money you just lost. This is also a dangerous place to be in emotionally.

In both cases, the first step is to disengage from the market. Stop trading. Now. Get out of the market, or get very, very small. Take some time away. (How much? That depends on you, but at least a few days.) The market will be there, and the emotional charge will start to fade if you step away. It may not at first, when you force yourself to stop trading, you may feel an immediate and overwhelming flood of emotion. This is normal, and it’s a response to the discipline you’re imposing on yourself.

Once you’ve stepped away, it’s likely the situation is going to get better on its own. The intellectual points I made at the beginning of this answer will start to be more meaningful when the emotional charge weakens. You’ll start to see through your pain and fear and see the reality of a drawdown. Drawdown sucks–don’t get me wrong. It can be soul-crushing, so I don’t mean to trivialize it, and people sometimes hurt themselves in ways that go beyond the market. You’re going to break the cycle so you don’t do that. Get control and back away, and then figure out how to work through this rough spot.

Small pieces make big plans

I think the ultimate answer to your question comes from perspective. The first shift in perspective is “trading for a living”–most traders find that it’s helpful to have multiple income streams. Even if your trading income is very high (relative to whatever baseline you would set), there are still going to be good and bad years in your trading. (As I said earlier: trading results are streaky and every trading methodology has drawdowns.) From a practical perspective, you can deal with these streaks in several ways. Perhaps you can plan ahead and save money for the lean times–this not necessarily the hardship it might seem to be because significant trading income can move your baseline much higher. Another possibility, and one that is attractive to many traders, is to have secondary income streams, even if they are relatively low compared to your trading income. Just knowing you have a portion of the bills paid can put your mind at ease and help you find the mental balance you need.

That’s the real problem here: you’ve had a fairly normal period of crappy performance. Perhaps a +8% month is just around the corner, so you can make back your loss rather quickly. You know this, but what you’re having trouble with is dealing with the challenges to your big picture plans and dreams. Let me bullet point some solutions:

  • Stop trading. Get some distance from the market.
  • Over the next few days/weeks, get the perspective you need to understand your losses are ok and just part of normal trading.
  • Re-think your long-term plans to make trading for a living a key part of those plans, but don’t hang all your hopes and dreams on your trading results.
  • Continue to refine your trading methodology and work on your skills of trading.
  • When you feel ready, get back in the saddle and continue trading.

The idea of focusing on process and just doing the next trade is essentially correct, but I think it’s only part of the solution. When you’re struggling mentally, forcing yourself to do the next trade can lead to a cascade of trading errors and that 5% loss can quickly become a lot bigger. It’s better to break the cycle and get control the of your emotions, recraft your plan, and then keep on keepin’ on.



Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.