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7 Steps to Surviving a Trading Slump

7 Steps to Surviving a Trading Slump


“How you think when you lose determines how long it will be until you win.”
… Gilbert Keith Chesterton, 1874-1936


As if learning to trade wasn’t already hard enough…

If you’ve been in this game more than a few months you would quite likely have experienced a trading slump at some stage – a sudden or gradual loss of form which lasts well beyond what should normally be expected.

Missing setups entirely due to lack of focus… hesitation at entry … holding losers past their stop… all the while to a mental backdrop of doubt, frustration, anger, confusion, and  continually negative self-talk.

Peak trading performance requires the trader to be in an optimal state – confident and focused, operating in sync with the market, with the ability to execute trades without hesitation.

What makes a slump so difficult to overcome is not just the fact that you’re in a sub-optimal state, but that the normal human reactions to the slump tend to maintain it or even worsen it. Continued drawdown can undermine your confidence and your motivation, leading to increased anxiety and continued poor performance. The process is self-perpetuating.

The markets are an unpredictable environment. Trade outcomes are never certain, and this naturally creates an environment of stress. If you’ve traded long enough to have some degree of success, then you will have developed ways to manage this stress and in fact may find it motivating. However when the stress increases to the point at which you start to doubt our ability to meet the demands of the trading environment, or to meet your expectations, you can find yourself very quickly digging yourself into a hole of despair, and a trading slump which if not addressed quickly could prove both financially and psychologically damaging.

So, what can be done to help us out of the hole?


Three Losses in a Row

3 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:
    1. Swapping one indicator for another,
    2. Optimising indicator parameters, or
    3. Adding an additional filter.
  2. Totally abandoning the strategy, usually followed by returning to their favourite forum to find the next Holy Grail strategy that is designed to make their dreams come true.

Is this the right response though?

Typically, trading decisions which are influenced by emotions rarely result in the right action.

So, what should be done?

First, before we continue, you need to confirm that you do have a valid, proven trading strategy. Have you conducted appropriate testing to satisfy yourself that it provides a positive expectancy? If not, stop trading it right now and return to testing. I don’t care what reason you had for jumping straight into a live trading environment, but the fact is that it’s difficult to psychologically trade a strategy in a consistent and disciplined manner when you don’t have complete confidence in its rules. You need to conduct thorough testing.

But assuming you have a strategy that has proven itself through positive results either in a testing or live trading environment, simply refer to your testing results or past trading history, and you’ll confirm that three losses in a row is a quite normal occurrence. In fact, it’s quite normal to have a lot more than three in a row. And it does not mean that your strategy is flawed.

Let’s look at this from a purely statistical perspective.