Know Your Probabilities
Traders will often experience 5 losses in a row and freak out. It’s human nature to catastrophize…
But depending on your strategy, 5 losses in a row can be a very normal occurrence.
If your trading strategy has a historical win rate of 45%, for example, then the probability of losing any individual trade is 55%.
Hence, the probability of losing 5 trades in a row can be calculated as follows:
0.55^5 = 0.1664
This means that the probability of having 5 losses in a row with a 45% win rate is approximately 16.64%, or 1 in 6.
I promise you, 1 in 6 is not that rare. Trade long enough and you will see it happen quite a few times.
So, relax. Know your probabilities, let the numbers play out, and always expect the unexpected.
Here are three risk strategies you can use to weather the storm:
1. Stick with your strategy.
This one is great if you’re already trading small sizes. Trading strategies go in and out of favor and that’s perfectly normal. Trust that the market will eventually start working in your favor.
2. Trade smaller when you’re in a losing phase.
Lower your position size as you’re getting losses so that you’re trading your lowest size when your trading is at its worse. This will help with your emotions.
3. Remain on the sidelines.
At least until the picture gets clearer and the market starts favoring your strategy again. That’s what’s great with trading: you have that choice. Not trading is also part of trading!