Trading is a tough game. It’s tough for a lot of reasons, but mainly it’s because it’s impossible to predict the future. The reality is that there is no way of knowing whether your next trade is going to be a winner or a loser. Moreover, you don’t know if your next 5 or 10 trades are going to win or lose.
When you’re going through these drawdowns, it’s easy to get upset, frustrated, and lose faith in your trading system and strategy.
But just because you’re going through a losing period does not necessarily mean that you should give up on your trading strategy. Although, some strategies work better than others.
The question is: are these losses just the natural part of the game, or does my strategy just not work? Read on.
First Of All, Have A Strategy
You could shoot from the hip. You could flip a coin. You could decide to go long if the winds blowing north, and short if the winds blowing south. However, none of these are actually strategies that are going to yield you any consistent results. So the first thing you need to do, if you don’t already, is to have a strategy that is based on probabilities.
There’s a saying that says if you fail to prepare, you prepare to fail. So have a strategy. Even if isn’t the best, it’s better than nothing.
Understand that trading is based on probabilities, and that your strategy isn’t going to win 100% of the time. A strategy that wins 100% of the time is called a “holy grail”, and that doesn’t exist in trading.
Track Your Trades
The best way to figure out if your strategy works, or not, is to track your trades. Yes, track them. It’s not glamorous, but it’s probably one of the easiest things you can do to increase your profitability and probability of success instantly.
Keep A Trading Journal
There’s many ways to track your trades online. Some brokers like Ninjatrader will do it for you automatically in their trading platform, as will many others. However, if you don’t want to pay for someone else to keep track of your trades, nothing beats an old-fashioned pen and paper (or Excel, for those in the 21st Century).
In your trading journal, you’ll like want to include the following things:
- Daily PnL
- PnL of each trade
- The time the trade was made
- The time the trade was closed
- The reasoning behind the trade*
- Stop loss and profit targets
- Whatever else you feel is important
*If you do this one thing, I can almost guarantee that you will gain huge insights into how well you are performing. A lot of successful trading comes from just eliminating bad habits that cause you to do dumb things. When I started to monitor why I was putting on a trade, it helped keep me from doing a lot of stupid things. Stupid things that cause a lot of damage.
Once you’ve tracked your trades, you’ll start seeing trends. You will start to see what is working and, more importantly, what is not working. From there, you can adjust your style.
Before you make any decisions on whether or not you should keep or change your trading strategy, you need data. By data, I mean trading history. In other words, track your trades.
If you make 3 trades by using Trading System A and you lose on those 3 trades, that is not enough data to dictate whether or not you have a good or bad trading system. Typically, statisticians tell us that you need at least 30 data points in order for something to be statistically significant. However, it’s just a rule of thumb.
The point here is that a few trades aren’t going to tell you whether you have a strategy that is going to win over time.
Wins And Losses Are Randomly Distributed
Do you know if your next trade is going to be a winner or a loser? Nope. If you have a trading strategy that wins 90% of the time, you might have 8 losing trades in a row, followed by 90 winning trades, and then 2 losing trades. Or you might have some other combination.
It is important to keep this in mind. It is because of the fact that wins and losses are randomly distributed that it is important to have a defined strategy.
How Do You Know When To Change Things?
Trading is very fluid. There is no cut-and-dry approach to trading. You will very likely find yourself evolving your style and strategy, rather than setting an exact date and time to change.
Find out what you’re doing, and adjust accordingly as you go. But also, remember that 1 bad trade does not make you a bad trader. Conversely, 1 good trade doesn’t make you a good trader either. You can do everything right and still lose on a trade, just as you can do everything wrong and still occasionally make money.
Know Your Personal Trading Statistics
Progress starts with being aware of what you are doing. If you don’t know your statistics, good luck trying to evolve into a profitable trader. Only once you know what habits you have as a trader can you begin to start changing those habits. As far as knowing when exactly to change those habits, that’s up to your discretion. The great thing about trading is that market tells you immediately what does and doesn’t work by way of your PnL.
Anyhow, I hope this article was helpful to you in more ways than one, as always. If you found some insights that you think will help you in your trading, we would love to hear about it in the comment section below. Thanks for reading.