Consecutive losing trades…How many can you take?

Quote from Rabbitone:

My questions to you are: How do you know when the system is not working the way it is supposed to? How many consecutive losses are one too many? When should the system be reevaluated (shut off) and when should it be left running?
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I don't mean to avoid your questions, but they all need to be answered in the context of the system one is trading, and the experience of the trader.

There is nothing more valuable than experience, because only with experience can a trader develop a sixth sense that tells him when there might be a problem.

If I've developed a system and know precisely why, how and when it functions, and I'm thrown for a couple losses, it isn't difficult to understand why, and what action to take. If I'm confused, then that's a sure sign I shouldn't be trading at the moment, or may not yet be prepared to trade at all.

And that only comes with experience. Because any system with positive expectancy can be further improved by engaging an experienced brain before pulling the trigger, or deciding that things just don't feel right.

This "feeling" thing can't be quantified, and can't be passed on to another trader. Which is why most mentors, including myself, ultimately find it frustrating to try to teach trading to someone else. But that's another story....
 
I try to find patterns that fail no more than 3-4 consecutive times in the past 2 years, then I wait for at least 2-3 failures before taking a trade. Very small on the first one, and if it fails, I go same size on the next one but with maybe a slightly larger target. Then if the losing string matches the all-time high for recent (2-3 year) history, which is very rare, I slowly ratchet up my leverage. Of course you have to constantly evaluate and adjust your strategies based on current conditions, ATR, etc.

Good trading to all.
 
Quote from lindq:


....And that only comes with experience. Because any system with positive expectancy can be further improved by engaging an experienced brain before pulling the trigger, or deciding that things just don't feel right...
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Linq – You mentioned a key item in keeping systems going – positive expectancy. I use it to pull the plug on trading a system. When I do my automated trading reviews if the expectancy of the system is negative for that trading period (where before it was positive). I put the system on watch. If the system continues to be negative and consecutive losses are present I pull the plug about half way through the next trading period. But I have learned to always give the system that second chance.

P.S. I have time if you want to tell that other story...
 
Quote from tomahawk:

I try to find patterns that fail no more than 3-4 consecutive times in the past 2 years, then I wait for at least 2-3 failures before taking a trade. Very small on the first one, and if it fails, I go same size on the next one but with maybe a slightly larger target. Then if the losing string matches the all-time high for recent (2-3 year) history, which is very rare, I slowly ratchet up my leverage. Of course you have to constantly evaluate and adjust your strategies based on current conditions, ATR, etc.

Good trading to all.
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Tomahawk – I like this method you mentioned. I have used it a couple of times to start my trending systems after 3 or 4 losses in congestion. It got nice results. I will have to use it again if this market heats up. Thanks.
 
Quote from tomahawk:

I try to find patterns that fail no more than 3-4 consecutive times in the past 2 years, then I wait for at least 2-3 failures before taking a trade. Very small on the first one, and if it fails, I go same size on the next one but with maybe a slightly larger target. Then if the losing string matches the all-time high for recent (2-3 year) history, which is very rare, I slowly ratchet up my leverage. Of course you have to constantly evaluate and adjust your strategies based on current conditions, ATR, etc.

Good trading to all.
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Tomahawk, can you provide an example of this (illustration would be great, but even a description of this in action would work).
 
interesting week for myself. I took a beating

monday - up $900 early. gave it all back
tuesday - down $1500 early. came back down only $800
wednesday - down $800 all days
thursday - down and up all day long. almost hit $500 a day.


mentally losing is hard. most of my trades are at the open or near it so my whole day can be determined by 10:00am...
 
Quote from NYC212:

interesting week for myself. I took a beating

monday - up $900 early. gave it all back
tuesday - down $1500 early. came back down only $800
wednesday - down $800 all days
thursday - down and up all day long. almost hit $500 a day.


mentally losing is hard. most of my trades are at the open or near it so my whole day can be determined by 10:00am...
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NYC212 – You have had a rough week. I feel your pain. But those losses are all part of the trading business. The question that I have for you and all traders in your situation is “Do you have what I call an Exit Plan in place to combat this type of situation?”

An “Exit Plan” is a governor on your trading machine to keep it from over heating. An “exit plan is not a condemnation of your strategy or trading. It is a cooling off period that you write in to your trading plan. It gives you time to reflect on market conditions that may not be right for trading your strategy. It is time off to evaluate why the trades in your log have not worked out as planned

Some of the common trading plan governors that I use in my exit plan to stop trading are:
- Taking one more than the planned consecutive losing trades.
- Losing no more than 6% to 8% of an account in a month.
- Continued negative expectancy that surfaced in an automated trading performance review.
- Large losses in automated trading (greater than the optimizations by 2 std dev).
- Actual drawdowns greater than projected drawdowns in automated trading.

So can you share your “exit plan” with us?
 
OK, today I took several losses in a row testing a "top picking" strategy with a poor platform for doing what I wanted to do. They were small losses and in fact my entire days loss was less than my max loss allowable on a single trade, so no problem there.

However, by the 3rd loss in a row with my strategy I was burnt out, it was near the end of the day, and so I decided that my tactic would only work with a DOM and I called it a day, just chatting a bit with my fellow traders.

Well you know the story: The stock gave a solid final run up and I failed to take that last setup, which turned out to be the real move I was looking for.

This just demonstrates the importance of staying focused for the entire trading day, despite the "wear and tear" several scratch trades in a row may have on you!
 
Quote from NoDoji:

OK, today I took several losses in a row testing a "top picking" strategy with a poor platform for doing what I wanted to do. They were small losses and in fact my entire days loss was less than my max loss allowable on a single trade, so no problem there.

However, by the 3rd loss in a row with my strategy I was burnt out, it was near the end of the day, and so I decided that my tactic would only work with a DOM and I called it a day, just chatting a bit with my fellow traders.

Well you know the story: The stock gave a solid final run up and I failed to take that last setup, which turned out to be the real move I was looking for.

This just demonstrates the importance of staying focused for the entire trading day, despite the "wear and tear" several scratch trades in a row may have on you!
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NoDoji – Thank you for your excellent trading story. We have all done what you have done. I found myself shutting down an automated strategy for just such a reason about 3 weeks ago. I had convinced myself this new strategy was not working according to normal trading and it violated my exit plan. In hindsight I had set the exit plan criteria too tight and volatility was too high that week. Like your trading situation the strategy recovered and is still producing on paper. And as you note the wear and tear can lead to giving back more of our accounts than necessary.

I have used Tharps idea to record mistakes like these in my log in his R format. If the R’s become large when I review my log I cut activities down to below normal until my mistake level is manageable.
 
Quote from Rabbitone:


So can you share your “exit plan” with us? [/B]
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overall i hate to lose more then $300. ideal day is gain $1000 but goal everyday is $500.

for example if I am in a trade it starts to go against me, I now will look at a simple moving average to gauge "hey time to get out"

If I am down more then $1200 total I begin to worry, I have done the cover 100% before :(

on Tuesday I was down $1500, hit cover all, this was so stupid since I bought MON at 86.50 (it went up over 4 points and that would have saved my day)

I do need to work on an exit strat more and I also need to determine, "ok this is a bad trade" cut it
 
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