The Psychology Of Losing Streaks and How To Overcome Them
In trading, consecutive losses are very common and some traders do not take it at heart. Instead, they try to make the best out of it, learn, adjust their strategy or money management plan if needed and just get on with it. It is not always that easy, however, to have this attitude. It is not unlikely, if you ever had a number of consecutive losing trades, to have thought that you are an incompetent trader or that you are possibly not fitted for live trading.
You may have experienced anxiety, disappointment and anger at yourself or anyone else that is involved (such as your broker or the market). This is a natural human reaction that has a chemical basis; a losing streak activates the production of cortisol, our body’s stress hormone. While cortisol’s primary function is to prepare our body to cope with danger by increasing glucose, the prolonged exposure to it that comes in tandem with losing streaks will render us anxious or even sad.
Anxiety and sadness will then work as “containers” for negative thinking. Suddenly, we see the world through those black glasses and we may engage in various unhelpful thoughts: “ I am a loser”, “ I will never make it”, “Should have never traded”.
But what happens as you think in this manner? Your anxiety, disappointment and anger increases and with them comes a lot of confusion, feeling scattered, unsure, lacking in confidence and belief.
There are some typical ineffective behaviours that traders may then fall into such as
- Overtrade to reduce losses
- Revenge trade to get back at the market
- Become extremely risk averse and trade too small or not trade at all
- Give up and close trading account
Escaping The Vicious Cycle Of Losing Streaks
If you do engage in some of the ineffective behaviours mentioned above, it is likely that you will end up trapping yourself in a vicious cycle. This is because risky trading behaviors such as overtrading or revenge trading are likely to make you lose again and, therefore, evoke the same unpleasant emotions and unhelpful thoughts that led you to it.
In order to exit the vicious cycle of losing streak psychology:
1. Become aware of the emotions that have emerged. Ask yourself: What am I feeling? Am I disappointed? Anxious? Am I Angry?
2. Understand the thinking pattern that accompanies these emotions. What is your mind telling you? Is it pulling you down, sabotaging you or maybe intimidating you?
Typical thoughts following a losing streak would be:
- I am a lousy trader. Should have given up long time ago
- My strategy must be wrong; I have been wrong all the way
- I cannot afford to just let it be. I must make back the money I lost
- It is just embarrassing to have lost more than half of my balance
3. Are you about to make trading decisions according to what you are feeling or thinking? Is this the best way to trade? Has this helped you to succeed in the past?
4. You can choose to break the cycle. Having unhelpful thoughts and emotions is very different from acting on them. Remember that if you act on them, you maintain the vicious cycle.
Instead of acting on your thoughts, keep your purpose in mind and act according to your goals:
- Examine if there are aspects of your strategy & methodology that need to be changed. You may opt to do so by going back trading on a demo for a while. But while demo can provide you with valuable insights about your strategy, it cannot simulate real market conditions; your psychology is going to be completely different when you trade live.
- Take a look at your risk/reward ratio. Are your stop losses too narrow or too wide? It often takes the time to determine the best ratio and you may have to be wrong before you get it right.
- When you trade, focus entirely on the present moment. Your mind may attempt to remind you of the past, or scare you with negative future possibilities. You must learn not to buy into it, because if you do, you will end up back in the vicious cycle. Your focus must be what’s happening in the market now.
- Keep educating yourself on trading. You could attend webinars, read online tutorials or join relevant forums.
- Exercise patience. You may be in the right way to achieve your trading goals and it could be that it just hasn’t happened yet. Be patient, have belief and don’t buy into negative self-talk.