Consecutive losing trades…How many can you take?

[Rabbitone]

In this thread we will examine consecutive losers as they affect the trader. This is not from the drawdown perspective but how it influences the psychology of taking the next trade. Here are some questions to think about.

Whether you trade with automation or as a discretionary trader how do you handle the trading psychology of consecutive losing trades?
How do you decide when there is one consecutive loss too many?
Do you trading high winning percentage systems with few consecutive losers?
What does your trading plan say about consecutive losers?
Do you ignore consecutive losing trades and focus only on drawdown?



The first example is consecutive losses in discretionary trading

http://www.tradingpsychology1.com/consecutive-losses-trading-psychology.html

Consecutive Loses and the Trading Psychology Spiral

You go long and the market immediately goes down - you go short and the market immediately goes up. That's 2 consecutive losses AND you are getting a little 'anxious' so you don't take the 'next' trade and it of course works. BUT to make the situation worse you then 'chase' the entry and it immediately reverses - another loss AND this is 3 in a row. Ok 1 more try - this can't happen on every trade can it - pray mode?

This time though you will be real clever. You have at least noticed that the market is in a range AND it's the bounce from the low/retrace from the high that is causing all the problems. So this time the next trade you take will be a range extreme fade AND the hell with your trading method. The market is at the range low AND per your new ‘on the fly’ plan you go long AND the range immediately breaks out giving you consecutive loser #4 - trading against a method trade that is going far enough to pay for the previous 3 losers and make you net ahead.
Now what are you supposed to do – QUIT? AND to be sure that there is no more temptation – your throw your computer out the window and dive out right behind it. You are in a trading psychology spiral……………….

 

[Rabbitone]

This example is from the premise that 90% of new traders cannot take more than 3 consecutive losses.

http://ezinearticles.com/?Three-Trading-Losses-in-a-Row&id=1535506

Three losses in a Row

Three losses in a row are tough. That's about the most consecutive losses that novice traders are psychologically prepared to accept before they feel compelled to take action and 'correct' the situation.
If you're anything but a total newbie, I'm sure you'll recognize the symptoms:
• Frustration - Why me? I've worked so hard. Everyone else in the forum appears to be getting good results with this strategy? Nothing ever works out for me.
• Anger - That strategy developer is a liar and a crook. My broker is running my stops. Someone should be held accountable for this.
• Doubt - What if the strategy doesn't work? What if I can't trade? How am I going to support my family?
• Fear - I can't lose more money, what will everyone say about me when they know I'm a loser? How can I tell my wife/husband that I've lost again?
And if that's not enough, the novice trader will likely be afflicted with the crippling inability to pull the trigger on the next trade, in fear of hitting a fourth loss in a row.
Usually, there is one of two responses:
1) The strategy is tweaked to ensure that the modified version would not have triggered these losing trades, through:
a) Swapping one indicator for another,
b) Optimising indicator parameters, or
c) Adding an additional filter.
or
2) Totally abandoning the strategy, usually followed by returning to their favorite forum to find the next Holy Grail strategy that is designed to make their dreams come true…….

 

[Rabbitone]

In this web site the author states an automated day trading system can have 10-12 losses in a row. If you’re an automated day trader does yours allow this many consecutive losses?

http://www.articlesbase.com/investi...p-a-profitable-day-trading-system-193420.html

• Most consecutive losses
The amount of most consecutive losses has a huge impact on your trading, especially when you are using certain types of money management techniques. Five or six consecutive losses can cause you a lot of trouble when using an aggressive money management.
In addition this number will help you to determine whether you have enough discipline to trade the system: Will you still trade the system after you have experienced 10 losses in a row? It’s not unusual for a profitable trading system to have 10-12 losses in a row…

 

[Rabbitone]

This web site states consecutive losses for price patterns.

http://www.tradingpatterns.com/About_Us/articles/fidelity/fidelity.html

The number of maximum consecutive losers directly impacts a price pattern's maximum drawdown and, consequently, a trading system that uses it. The theoretical minimum is zero, corresponding to 100-percent profitability (no consecutive losers). A maximum of three to five consecutive losing trades is realistic for price patterns. However, you must experiment with such performance….

Is this your experience with price patterns….

 

[slacker]

Quote from Rabbitone:


Three losses in a Row

Three losses in a row are tough. That's about the most consecutive losses that novice traders are psychologically prepared to accept before they feel compelled to take action and 'correct' the situation.

There seems to be something important about '3 losses in a row'.

Why is it that we believe that if it has happened three times, it will happen again?

"I once told a story about this: We once traveled from New York to Boston on a Sunday night, and we saw a car on fire on the side of the road. A week later, again on a Sunday night, we were traveling and again saw a car on fire in the same place. The fact is, we were less surprised the second time than the first because we had learned a rule: Cars burn at this spot.

"We find this everywhere - the speed at which people create rules, norms and expectations, even when they know it's ridiculous. This is the intuitive method at work. It remains true that whenever I travel, I always look for burning cars at that spot."

From an interview with Nobel prize in economics Daniel Kahneman you can read at http://www.haaretz.com/hasen/spages/1077151.html

Very interesting.

I also remember an interview on the radio with the hall of fame coach John Maddin, I remember what he said about losing:

"When you lose 1 game; you think you had a bad day. If you lose 2 games in a row you have a losing streak. and If you lose 3 games in a row you question yourself if you will ever win again..."

You might also ask 'how many winning trades can you sustain before you are lulled to sleep and really screw up'? The other side of the same coin.

The mind is capable of rationalizing anything, finding patterns in random data that do not exist, and any number of other triggers can can push the brain from rational to irrational in a second.

Therefore... it is necessary to have some other measure of success that can be trusted more than 'feelings'.... The better your method of risk management and the less it is based on individual feelings the more consecutive losses you can sustain. (IMHO)

 

[maxpi]

If I get upside down in a trade it just means I'm temporarily out of synch with the markets and I get back with the trend.

 

[Cutten]

Consecutive losers either means your approach is right but you were unlucky, or your approach is wrong (either temporarily or permanently). You need a way to distinguish between the two before you start trading with a certain approach.

 

[Rabbitone]

Quote from slacker:

There seems to be something important about '3 losses in a row'.


From an interview with Nobel prize in economics Daniel Kahneman you can read at http://www.haaretz.com/hasen/spages/1077151.html

Very interesting.

I also remember an interview on the radio with the hall of fame coach John Maddin, I remember what he said about losing:

"When you lose 1 game; you think you had a bad day. If you lose 2 games in a row you have a losing streak. and If you lose 3 games in a row you question yourself if you will ever win again..."

(IMHO)

My normal strategies give 3 to 5 losses. Some of the advanced automation I trade regularly gives me 6 or 7 consecutive losses. But, many ET traders I have PM’ed have told me they washed out of automated trading because they were not prepared psychologically for taking 3 consecutive losses even though money management was done correctly. So how did you learn to take it?

 

[Rabbitone]

Quote from Cutten:

Consecutive losers either means your approach is right but you were unlucky, or your approach is wrong (either temporarily or permanently). You need a way to distinguish between the two before you start trading with a certain approach.

Let us assume the approach is correct. In automated trading one approach is to add 1 to the projected number of consecutive losses from the out-of sample optimization report of the strategy and multiply this times the average loss to get a projected max drawdown number.

The problem seems to be too many traders cannot get to the out-of sample optimization report consecutive loss number in live trading even though they do the math. For example the trader will see 5 consecutive losses add 1 to get to 6 then multiply this by $261.27 average loss to get to a max drawdown of $1567.62. In this case, many traders will not make it past the third consecutive loss even though the drawdown is in-line to reach $1567.62. These traders quit long before they are unlucky, why is that. Many of these same traders will be able to trade through the drawdown if it occurs in a non consecutive loss situation? What is so daunting about consecutive losses?

 

[nutmeg]

Quote from Cutten:

Consecutive losers either means your approach is right but you were unlucky, or your approach is wrong (either temporarily or permanently). You need a way to distinguish between the two before you start trading with a certain approach.

approach is right but you were unlucky,
------------------------------------------------

Scale in.


your approach is wrong (either temporarily ...
____________________-

Scale in

--------------------------

Narrows down the prob of losing, the all in trade. Easier on the psyche.

Thoughts?