Dealing With Consecutive Losing Trades II

I had your exact same problem a few years ago. I would keep a trading journal with various statistics about each of my trades. I would experience some decent winners and then the inevitable losses came. I had no problem taking a few losses in a row (3-4). Eventually some very bad string of losers came to the tune of 7-8 in a row and I kept asking myself why? Why isn’t my system good enough to avoid such large consecutive losing trades. Why couldn’t I be in harmony with the market’s momentum? Why couldn’t my trading system be in harmony with the market? Now some trading systems can still be very profitable with low win rates, but my personality wanted something better. My personality could handle 3-4 losses in a row but not 7-8. The nagging question of why I had such large strings of losses was stuck in my mind. Eventually I found out a few reasons that my performance was bad. First and foremost my system sucked because it couldn’t successfully be in harmony with the market and thus did not really have a major edge. Second reason was that I did not have good enough filters to keep me out of the bad trades while keeping me in the good trades. Third reason was my trader psychology and emotional development/fortitude needed to be improved.

You are right that every trade is unique. The market doesn’t care whether your previous 8 trades were consecutive winners or losers it will do what it wants to do. During a trade unforseen market events can cause your trade to be a slam dunk loser or a slam dunk winner.

I am not sure what type of trading system you use but let me layout a small example.

You have a trading system that has the following entry criteria:

1. A moving average crossover occurs. Once this occurs you look rule #2
2. You ensure that their is a divergence on your RSI indicator in your favor.
3. Once rule 1 and 2 and satisfied then you look for a pullback to a “big round number” to enter a trade.
4. Use w/e stop or exit strategies you want.

I don’t know if the system works or not it is just an example.

So you test the trade system out and record the results diligently in your trade journal.

Eventually you come to the problem of why did my trade succeed or fail. You go back to your checklist and ask yourself if you followed the rules of your system. You say to yourself that you followed the rules of your system and deem the trade an acceptable loss.

The problem lies in that many trader’s believe that the moving average crossovers, divergence, pullback to round number caused the market to move(as well as many other technical indicators and other stuff). Market’s are moved by order flow and I highly doubt that those trade entry criteria caused the market to move. It didn’t cause the market to move but that is how many trader’s view the market. Some of them don’t care why the market moved and that is their own choice.

Market’s are moved by order flow and everything that generates order flow. Things such as news events, market sentiment,unfulfilled expectations among many other things that do not appear on the chart. The probability of any trade succeeding is not constant once you place a trade. Even if your system states that your trade has a 40% probability of success that may not be accurate due to the variables in play which do not appear on a chart. It is constantly going up and down because of the information which doesn’t appear on the chart. If you only look at charts and ignore the plethora of information which doesn’t appear on them then you don’t’ have a very good chance to know why the trade succeeded or failed.

But people may say I have backtested the system and it worked out. You can easily get a chart and figure out what the RSI reading or moving averages were for that particular day in the past. What is not easy to do is figure out what was truly moving the market, what was generating order flow, what the emotions were of the market participants on that particular day in the past.

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