No one likes a losing trade…

2 losing trades in row really niggles…

3 losses, and you’ll feel that you’ve paid your price and deserve a few winners.

Then… number 4 hits you.

4 losses in a row!?

Now you’re really shaken.

You’re probably feeling frustrated – why’s this happened to me? I followed the strategy to the letter.

You’re likely to feel angry – this must be someone’s fault. Perhaps the system developer is running a scam or my broker is chasing my stops.

And most debilitating of all is the feeling of doubt… perhaps this strategy doesn’t work… perhaps I shouldn’t place the next trade…

Emotional vs rational responses

I’m sure these emotions will sound familiar to any trader. I know that I’ve been through them many, many times myself.

For me, 4 losses in a row is my psychological limit before I start to feel that I need to “fix” something…

Despite months of careful testing, I begin to look for a modification that wouldn’t have triggered these four losing trades…

I think about adding an extra filter…

Or tweaking the settings on my current technical indicators…

I know that for many traders, that fourth losing trade is enough to make them abandon a strategy altogether.

Of course, these are all emotional responses. So, how should we react in a correct, rational and calm manner?

What should you do?

Here are the questions you should be asking yourself…

1. Has this strategy been properly tested before you began live trading?

If you tested it yourself, and are happy that you did a thorough job – great. If someone else tested it – do you have confidence in them? If you do, that’s fine.

If you’re in any doubt, I recommend that you go back to paper trading this strategy. If you carry on trading, whilst still having all these feelings of doubt, it is unlikely that you’ll be able to keep disciplined and consistent with your trading. You need to believe in the signals you’re following.

2. Now take a rational look at just how likely it is for this to happen. Have you been unlucky? Or is this part of your strategy?

There’s a simple piece of maths that will calculate just how likely you are to have a losing run, provided you know the expected success rate of your trading strategy…

Probability of 4 losses in a row = (losing rate) to the power of 4

So, if your win rate is 60%, your losing rate will be 40%.

For the sake of the calculation, we use 0.4 as the losing rate.

So (0.4)^4 = 0.0256 (which equates to 2.56%)

2.56% is your probability of getting a run of 4 losing trades.

It might not sound like a lot – it works out about 5 times in every 200 trades.

But, bear in mind that you’re probably trading hundreds of times in a year, so these runs are going to come along. You haven’t done anything wrong – these losing runs are a valid part of your trading strategy.

If the two questions above have put your mind at ease, then you should be able to carry on trading.

If you’re still struggling with this, then it may be that you need to reevaluate your money-management plan. If a losing run (which is a valid part of your strategy) is causing you too much pain – chances are that you are staking too high.

Reevaluate your staking plan, and, if necessary, return to paper trading until you have your confidence back.