One Sure Way to Stop a Losing Streak

06/05/2012 1:30 pm EST

Focus: TRADING

Merlin Rothfeld

Instructor and Host of Powertrading Radio, Online Trading Academy

Losing streaks can turn into landslides if not handled properly, and Merlin Rothfeld has set trading rules that dictate when it’s time to step away from the markets and refocus.

Everybody likes to talk about their winners and trades that went well, but what about the trades that didn’t go well? Our guest today is Merlin Rothfeld to talk about that. So, Merlin can you talk about losing trades and why it’s helpful to break those down?

I look at it this way: if you have a winning trade, you didn’t do anything special. It wasn’t anything out of the ordinary. You probably did what you were supposed to do. You had a set of rules, you followed whatever technical indicators or whatever justification you had to make the trade, so why should that give you bragging rights other than “Hey, I made money?”

I learned to not brag about making money anyway, because then the market hears you and takes it all back later on. So, I’d rather talk about the losing trades.

You know, something interesting happened to me recently, which is in my trading plan: I had three losing days in a row, which doesn’t happen very often.

Maybe a couple of times a year it happens, and I learned back when I started in the 1990s that a bad streak can manifest itself psychologically and turn into a monstrous losing streak, where you could have ten, 20 losing days in a row, and your account is gone like that.

So, in my trading plan, if I lose three days in a row, I have to take two days off. I’m forced to take a two-day break, regroup, and not trade. You can still look at the markets, but don’t get involved with it from an execution standpoint of actually buying and selling things.

I think it’s really important because it allows a break. Sometimes when you get on a couple-day losing streak or you have three of four losing trades in a row, you start doubting yourself; you start thinking you’re doing something wrong.

Just take a break, because like I said, it will manifest itself and that negativity will grow to bigger and bigger losses.

Do you change anything when you do come back or is it just getting away from the market that clears your head?

Getting away from the market clears my head. Sometimes there’s just some really, really bizarre volatility going on, and I don’t think that I’m doing anything wrong. It’s just my timing; maybe I’m out of rhythm or out of sync.

It’s kind of like a batting coach. I did a blog entry a while back on Derek Jeter, who is batting .315 lifetime for the New York Yankees.

Now, I don’t like the New York Yankees, but Derek Jeter is arguably one of the best in the world, but he went through a period where he was 1 for 36 when his lifetime average means 30% of the time he hits.

So, what’s going on his mind during that streak where he’s just not hitting? He didn’t change anything. He just got up the next time and said “You know what, I’m going to do exactly what I do every time. I will get back on track. It was just a minor little slip.”

So, look at that from a trader’s perspective, and every single person has to have that in their trading plan. It would be a circuit breaker for the number of losing days you have in a row, and more importantly, a maximum loss you’re going to take for any trade.

How about intraday, if you have four trades in a row? Do you have something in your plan that says you’re not going to take that fifth trade?

Yes, but actually, I don’t take that many trades anymore. You remember me from the late 1990s when I was doing 550 trades average per day, which is ridiculous.

Now I probably do three or four trades a day. So to me that’s a done day, and if I lose three days in a row during the week, I’m done too. You’ve got to take these breaks.

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