Hi guys, I just want to put some perspective on losses here.
While I was waiting for GBP/CHF to actually move today, I did some calculations.
I don't think they are absolutely perfect, but they aren't far off the mark.
How many losses in a row should you expect to be able to stomach?
Based on 1000 trades, with an average loser of 20 pips, and a strike rate of 33%, you can realistically expect at some stage to encounter a losing streak of 17 losses in a row, during those 1,000 trades.
That's
340 pips.
Based on 1000 trades, with an average loser of 20 pips, and a strike rate of 20%, you can realistically expect at some stage to encounter a losing streak of 31 losses in a row, during those 1,000 trades.
That's
620 pips.
Losing streaks do come when you are cutting losers and running winners. In the same way that the winning streaks will come if you are operating the opposite way, with a higher strike rate but with smaller winners and bigger losers.
The difference is that when you are cutting losers and running winners you are
taking the pain up front. You are doing the hard work on an on-going basis, grinding your way through the frustration of lots of small losers. Then,
BAM, the big winner comes along, and if you have the discipline to let it run, it wipes out all the losses and more.
With the other approach, you take small wins regularly and you develop a sense of ease and comfort with your trading. You are taking your small wins and are regularly patting yourself on the back. But you haven't repealed the laws of mathematics, you haven't discovered the holy grail. All you have done is
postpone the work till some point in the future. Your day of reckoning, when the the rubber hits the road, will still come.
But with this way, when that loss comes,
BAM - it comes all in one go. Weeks, or months of work are quickly wiped out. Psychologically, that is really difficult to deal with, and that is why you see the accounts blow up, massive drawdowns, retail traders screaming in pain. Discipline goes out the window, strategies get tossed out or tinkered with, and a whole host of stupid needless changes get implemented. Resolutions are made, the account gets funded fresh, and the cycle starts again.
Pick your poison Gents. There is no avoiding the losses. They are guaranteed to come, one way or another. Your choice: Small, regular, manageable,
or huge, sporadic and life-threatening.
My way is to deal with losses
calmly, methodically, regularly, spread them out over time. No one loss by itself can harm me more than being a minor annoyance. They are regular, they are just part of the trading day.
The usual way is to try
avoid losses, postpone them, put them off into the future.
What did your mother tell you about dealing with your problems? You tackle them head on and you deal with them. If you put them off, let them fester and try to avoid them, they will eventually come back at some stage to bite you in the arse. And when they do come back, they will have grown and multiplied, and they might just be too big for you to cope with by then.
Deal with the losses up front. Go into each trading day expecting to lose. Don't try to leave your losses to another day
Here's an interesting thought experiment. What would happen if we just flipped our thinking around and instead of trying to close winning trades, we tried to close losers. Our goal was to close as many losing trades as possible. Sounds easy? Bet you it isn't, because eventually some winning trade will get away from us and steam into profit and it won't come back. Try it on a demo and see.
Flip that thinking back around again.
That is what we are doing here. We are just working our way through the losers until that big winner comes along. We sit down at the trading screen and work our way through those losers, calmly, methodically, and without emotion. Then, I guarantee it, that big winner comes. It always does. It's precisely the same reason why everyone tells you to use stops, except in reverse.
Have a nice evening
