Any trader facing the markets will suffer a terrible circumstance sooner or later: the losing streak.
As we must already know, every trader starts his journey with some kind of system, be it more complicated or more straightforward.
This system will be implemented with a trading plan which will involve -or should involve- quite clear profit taking and loss taking parameters.
Every trader assumes that when the time comes, he or she will have to take on these losses, but you can barely imagine how tremendously hard it is to endure a contrary streak; and, no system or trading plan can prevent it forever, no matter how well thought it is.
In this sense, there can be a severe problem, which is very common in most people who try to trade in the short term.
Trading negative gusts
This is a crucial problem that causes countless accounts to fail throughout the year without the owners realising it.
The problem is that people assume the system or plan adopted is excellent, and any lousy streak will be short-lived, when in reality many of these systems are “over-optimised” and utterly ruined.
Moreover, “bad spells” are sometimes nothing more than the real confirmation that the supposed big trading plan is no longer a failed system.
Unfortunately, many traders realise this when it is too late. Those traders, many of them with nerves of steel, endured the lousy streak thinking that it was only a matter of time before the definite streak came and they made a lot of money and made up for it.
The stubborn reality tends to teach that in most cases such gusts are nothing more than the recognition that these systems do not work.
In the end, these traders end up with their accounts ruined and not knowing what happened.
In this respect, we have to say that the myth of bad spells is overestimated, when, in fact, what happens in the vast majority of cases is something like what we have just said.
This is so because winning in short-term trading is very complicated, hence the problem of “bad spells”, which is not that they are “bad spells”, but that they are part of the plan.
A separate issue is the bad spells within effective trading systems, which are obviously in the minority and challenging to find or discover.
Once a trader has gained the right experience and found a system -usually after having endured terrible losses in the past- then he has to put his plan into play to deal with the bad spells that even good systems end up having.
First of all, a veteran or “nose” trader should not fear a bad streak and should remain calm in all circumstances, no matter what happens.
To deal with bad gusts, we already have our trading system and plan which, if it is good and has proper parameters, will have the relevant “shields” or “lifeboats” in place, which are another way of calling for proper “risk management”.
If the trader applies moderate, reasonable risk management and does not risk much per trade, increasing the position when he wins and reducing it accordingly when he loses, he should not be afraid of bad spells, because if the system is “good”, he will eventually recover and even have good periods, sometimes as big as bad ones.
In the latter sense, we have to say that in many successful systems, especially those that have to do with following the trend, bad gusts often come together, and significant positive blasts follow them.
This is especially the case when the market has been stagnating for a season (in a lateral range), and there is a sizeable upward break in the overall market, with the result that the bad streak ends up becoming a significant profit, i.e. a good streak’.
This will be understood, for example, by those who try to trade break-outs and hit the wall repeatedly, later on seeing how this market has entered a relatively strong lateral range.
Although we might be tempted to break our breakout trend system, it is at those times when we must remain faithful to it, because when there are large lateral ranges for a reasonably long time, the rupture of them is usually of high magnitude.
This is similar to when you inflate a balloon for a long time and see that it never explodes, but eventually, it does so in a naturally “explosive” way. Seen in a different light, it is like the one who “tightens” the rope until it breaks.
If we see that the rope is “tight” and we bet that it will break, we will surely have several defeats – which will be part of the “bad streak” – before it breaks. The trick is that by holding out, we bet on a significant profit that will come from the rope breaking.