One aspect of being a professional Forex trader which many traders are unprepared for are the depressing draw down periods.
Losing streaks can rattle your cage and play havoc on your emotions, confidence levels, and feelings of self-worth.
If you’ve been trading for a while, then I know you can relate to what I am talking about here. Consecutive losses put you in a state of ‘panic’ which severely degrades your decision making process.
So, what can we do about it? How can you recover from a Forex losing streak or even avoid them in the future?
Sorry to say, the real truth is you can’t completely avoid these kind of stacking losses – they are simply a fact of trading. It’s very important that you learn to prepare, anticipate and deal with the issue – so when the time comes, the mental/emotional impact is reduced.
Don’t be one of those traders who believe ‘it won’t happen to me’, because the reality is one day – it will. Even the best trading system out there is not free from the occasional losing streak.
Forex losing streaks are normal, it’s how you handle yourself in these situations which matters.
Trading is a profession that centers around statistics and probabilities, so it’s very unhealthy to believe you will never lose money – you should expect losses.
In the ‘heat’ of a draw down period, your future as a Forex trader will all come down to how you handle yourself in your moment of despair.
Will you crumble under the pressure, and let your account disintegrate with your emotions? Or, will you stay strong, disciplined and logical while maintaining a rational mind-set, and maximizing the chances you have of ‘weathering the storm’?
In today’s guide, I will share some tips with you to help you with these ‘lower lows’ of your trading journey. Feel free to refer back to this article in times of need.
Don’t let your mind play tricks on you
Placing a trade is easy enough, maybe a little too easy. It’s just a button click away and within milliseconds your trade is live.
The ease of placing a live trade can make a trader ‘act on impulse’ without really thinking about what they’ve done. This is especially true when you’re feeling emotional, just like when you’ve taken a few consecutive losses.
When you place a trade, you’re doing so because you believe the odds are in your favor, and you’re exploiting your edge in the market.
When traders are suffering from the emotional side effects of draw down, it’s easy to become desperate and feel a sense of urgency to take another trade in an attempt to make up for the recent losses – even if there is no real good trade to be taken. This is revenge trading 101.
When you trade with desperation you’re going to make poor choices, and the market will exploit those feelings and use them against you.
You will start to convince yourself there are good trades in front of you – like a stranded person in the desert will see mirages in the distance. It’s just your mind playing tricks on you.
It’s important you maintain discipline by only taking high probability trades and not settle for “Tier 2” or “Tier 3” grade trades – just because you’re anxious to win your money back.
Consistency is the key to success and will be a vital component when recovering from a losing streak. Don’t shoot first and think later, plan your trade with a clear mind then trade your plan.
[summary]Forex draw down periods can cause negative emotions like anxiety and desperation. This is a perfect storm for revenge trading which is one of the fastest ways to blow a Forex account. You can’t make rational trading decisions when you’re upset or anxious. Disconnect from the markets, clear your mind and come back to trade another day.[/summary]
Use a trading journal To HIghlight Potential Problems
In our article: “How to keep a Forex trading journal“, we talk about keeping a journal designed not only to record your trade data, but that should also contain the psychological component of your trades.
This way you can track how you ‘feel’, or your ‘state of mind’ during the different phases of your trades – very important.
This psychological data can be utilized during Forex losing streaks.
Go back through your recent trades in your journal and compare all your trades which make up the period of the draw down period.
There is a good chance you will see a common ‘issue’ or ‘weakness’ with the way you were feeling, or dramatic change in your mind-set at the time.
These things probably eluded you in the heat of the moment when pulling the trigger.
It’s likely that the only thing on your mind was the desperate thoughts of making a comeback with a big win – which was going to make up for all your losses plus change.
The problem is most traders will do almost anything to recoup losses in the market, but are willing to do little about improving their mental or emotional performance. This is why revenge trading is such a huge problem.
It’s your attitude towards the market that disintegrates as you hit more and more stop losses. Provided that you were honest with yourself when updating your journal, you should be able to see on paper where your discipline is failing.
Before you take any trades, you should refer to your journal and remind yourself what happens when you trade from impulses and operate as an undisciplined trader.
It’s very easy to make emotional based trading decisions when you have a very low trading ‘self-esteem’.
Utilize your journal – let it keep you focused and on the true path of discipline and prevent you from repeating costly mistakes.
[summary]A trading journal is more than a record of your trades, it should be a record of your emotions as well. By recording your state of mind and thoughts with every trade, you can provide yourself with valuable data that can help strengthen your mental and emotional health for your future trading. Keep your journal up to date and give it a quick read over before you start trading each day to remind you where your weaknesses lie.[/summary]
Maintain positive risk reward ratios
Remember Forex is a business, and business’s need return on investment.
Each time you place a trade you’re risking some of your capital with the intention of getting return on investment.
You only risk that capital when you’re trading system tells you the probability of getting a good return on your risk is in your favor.
Positive risk reward ratios are a simple mathematical concept that ensure you always aim for more return than you risk on every single position.
Every time a trade hits target, you double, triple, quadruple etc. your initial risk on that trade.
When you crunch the numbers – positive ratios allow you to have more stop outs than successful trades, and still have the ability to grow your account.
In our guide to risk/reward ratios, we demonstrate how 1:3 is the ‘Goldilocks’ of all the risk/reward ratios. Using the Goldilocks ratio, you only need to hit target on 33% of your trades to make money, because one winning trade will eliminate the draw down of 3 previous losses.
It’s crucial that you maintain proper risk/reward structured management – even more so when going through periods of draw down.
If you remain discipline and focused, you will eventually start to see your trades hit target. It’s not uncommon for one properly planned out trade to eliminate all the losses of a losing streak.
War room traders often experience trades with return ratios of 1:6. To put that in perspective for you – losses from six previous losses are recouped. I am not saying 1:6 trades come everyday – but they are very real and will do wonders to dig you out of those draw down slumps.
Maintaining strict money management is vital during these hard times – it won’t be easy and will be a harsh test of discipline. Positive risk/reward ratios should be the core foundation of any solid money management system and really are vital if you want to get back in front.
If your money management strategy allows for losses to be greater than your trade targets, throw it away now before it screws you over.
[summary]It’s important to use a money management system that promotes positive return on investment through a positive geared risk reward system. This will help you avoid getting into draw down in the first place. Your winners should out perform your losers so you can lose more trades than you win, and still be ahead.[/summary]
Have faith in your trading system
Forex losing streaks will come and go.
Trading with a system that you can really rely on and put your faith into is going to be very important.
Just like a diet – if you don’t think it’s helping you, then you won’t stick with it and you’ll revert back to your unhealthy ways.
A trader needs confidence in their trading strategy to be able to remain in good mental and emotional health.
Trading is futile if you don’t believe in the trading methodology you’re practicing.
I know at the time losing streaks will make your question your trading strategy – and even tempt you to make those ‘on the fly’ adjustments to your trading plan.
Remember the market is dynamic and goes through different phases.
One or two of those phases might not work well with your system. If you start fiddling with your rules, you may render your trading system useless in market conditions where you would have otherwise experienced good returns.
Don’t try to fix something that’s not broken – no strategy has a 100% success rate.
One aspect I believe is critical is that you truly understand the reasons why you take the trades your system generate.
I’ve seen traders who just blindly follow trade alerts handed out by some ‘magic indicator’ they’ve purchased. The trader has no idea why they are pulling the trigger; they just do because the Forex indicator said so.
How can you have confidence in the system when you don’t even know how it’s coming up with these trades? The focus should always be how the trading system derives trading signals. It should be based on logic that you can understand.
This is one of the big reasons I am a passionate price action trader. Trading with price action strategies really allow you to understand the movements of the market and confidently identify high probability situations where you can pull the trigger without hesitation.
[summary]It’s important that you believe in your trading strategy, if you don’t – you will abandon it at the first sign of trouble. No Forex strategy has a 100% win rate, so it’s important that you understand how your trading system generates it’s buy and sell signals, and the reason why you’re trading them. This will allow you to build the ultimate relationship with your trading system and stick with it during those tough negative periods.[/summary]
If a Forex trader tells you that he can trade absent of emotion, he is lying. As a Forex trader, you will forever be fighting with your emotions making sure they stay suppressed and away from your trading decisions.
From time to time you will have a lapse in discipline. No one is going to blame you because you’re only human and you can’t escape emotions unless you’re a robot or you have no soul.
Periods of draw down caused by Forex losing streaks are really going to flare up your emotions and there is a good chance they will start to get the better of you and you will become another Forex trader failure.
Most people take their trading performance personally and these losing streaks become a reflection of how they view themselves as a person – resulting in the trader experiencing low self-esteem and periods of depression.
Like I said, whether you like it or not you will experience emotional turmoil from time to time, but it’s how you handle these situations that greatly impact your chance of success.
Sometimes a trader may bring stress from their outside life to the trading screen, like a bad day at work, or a family argument. The best thing for you to do when you’re emotional is step away from the charts – seriously it is such a simple thing, but can do you wonders. Sitting in front of the trading screen in a negative state-of-mind is not healthy.
Get up and go do something that will take your mind off of Forex trading. Go the gym, it’s important to maintain your health, go watch a movie, or organize to go out with some friends – socializing with your peers will be a refreshing experience from the solitude of your trading screen.
Go for a 5 km hike up a mountain to an isolated waterfall and do some meditation, do whatever it takes. You will find once you’ve had a break and participated in an activity you enjoy, you will come back to the markets with a fresh positive attitude.
[summary]The best thing to do if you’re feeling emotional is to walk away from the trading screen, and go do something that will help take your mind off the market and relieve stress. The time away will help reset you back to a rational mind-set and you will be able to think with clarity again. Walking away from the markets has saved me time and again, from doing really silly things in the past.[/summary]
Trade in favorable conditions
Helping hundreds of traders in our Forex War Room has given me good insight to where a lot of traders are making their mistakes.
One of the big issues with new traders is they tend to fixate themselves on one market and sometimes become obsessive over it. Traders tend to mistake bad price action signals as good ones due to lack of consideration of the market conditions surrounding the signal.
Trends are where the big money can be made for us, and consolidation periods are just ‘black hole’ money traps. Trading when the market is not going anywhere, is like flogging a dead horse and expecting it to do something.
The price chart above shows a typical sideways market that continuously printed price action signals.
None of these signals should have been considered when the market was congested in this way.
Often, a trader will be stopped out on the first trade and follow-up with a ‘revenge trade’ on the same market to try get back at it. They continuously throw money into these bad signals, getting caught up in more and more consolidation.
It might be helpful to create a rule for yourself to stop trading for 24-48 hours if you suffer more than 2 losses for the day.
The chart above shows price action signals that formed in favorable market conditions and they all saw price follow through with the dominant trend. The market conditions should be the first ‘check’ when you look at a chart, if there is no movement then do yourself a favor and move on.
[summary]Sometimes the basics are easily overlooked, or neglected. Check the market conditions you’re trading in – if you’re looking at a congested sideways market, then you’re likely to have a higher stop loss rate. If you trade markets with nice trending conditions, then your chances of success greatly increase as the market has some direction to it.[/summary]
Don’t Give Up!
Stay away from consolidating markets, you can’t rescue a bad trade by digging yourself a deeper hole.
Remember, Forex losing streaks aren’t an abnormality in trading. Each individual trade is completely independent of the last.
Just because you’ve had 8 losers, doesn’t mean the next 8 trades won’t be winners.
Don’t become desperate or anxious, otherwise your money will flow into the pockets of the confident, disciplined traders.
Always maintain positive money management so your winning trades will outperform your losses and make drawn down periods a less likely event.
Don’t fall prey to revenge, or ‘panic’ trading. You need to maintain trust in your trading system, remain patient, disciplined and always have realistic expectations of the Forex market.
If you’re looking for a trading system that is logical and you have to understand why you’re placing trades, then price action trading is my recommendation to you.
If you want to learn low risk/high probability price action setups, and be shown how to tie in positive geared money management into your trading, then becoming a War Room trader might be something you would want to check out.
You will have the ability to interact with other price action traders, so if you’re feeling down in the dumps from a losing streak, there will be a community there to help pick you back up on your feet. Strength in numbers!
I hope this article has been helpful and insightful, and given you the motivation to get back on track with your trading.
Good luck on the charts this week.