Losing Streak

Let’s not sugar coat this. Losing money trading is painful. Big losses are gut wrenching losses. Huge losses are turning pale, hand trembling, losing sleep, ache in the pit of your stomach losses!

But let’s put losses into perspective:

Losses are simply the cost of doing business as a trader. You are going to have losses, get used to the idea.

It’s just like a fruit and vegetable shop that has to throw stock out that has gone off. You get rid of the losses so you can put your working capital back into a profitable trade.

And let’s put the size of losses into perspective:

If your losses or your potential losses are keeping you awake at night or causing negative physical symptoms your position size is too big. Simple, reduce your position size.

Here is a saying I love and I know personally to be true:

Losses make you stronger, profits make you weaker!

Yes, think about that.

Losses make you stronger, profits make you weaker!

You learn the most in life when you go through challenging times.

You learn the most in trading when you have losses. You learn most about your trading systems, and your threshold for pain, and your feelings about money when you lose. So losing can be a very good thing. In fact whenever I take a significant loss I always view it as tuition fees I have paid the market. I analyze the loss, learn from it and strive to improve myself and my trading system so that I do not lose money in the same way again.

A lot of top traders say the same thing, something like “The reason I am so successful now is that I have made so many trading mistakes and lost money so many times, that I finally understand what I am doing.”

Losses are an integral part of the trading experience.

If trading was easy there would be no bus drivers (no offence intended to bus drivers).

All Super Traders take losses (usually super losses). Here are some examples:

In 1998 George Soros lost $2 billion in Russian Funds when they defaulted.

Julian Robertson was the fund manager of Tiger Management Group, which had $23 billion at its peak and $6 billion when it was rolled up (i.e. it lost $17 billion over that period). He lost more than $1b of his own money.

Richard Dennis
(Market Wizard) ran into a losing streak:

In 1987 and 1988, when he was trading as much as $159 million, his net loss after fees was $60 million. And in 1992, when his equity climbed as high as $86 million, he lost $48 million.

Mark Cook (Market Wizard) starting trading with a few thousand dollars and by selling options built it up to $165,000 in a few months. Within one month he lost over $500,000; the $165,000 plus $350,000 he didn’t have. Rather than declare bankruptcy he worked two full time jobs for five years to get back to even.

Jesse Livermore who made $100m by short selling the 1929 crash was declared bankrupt in 1934! How do you lose $100m in five years???

Marty Schwartz (Market Wizard) has this to say in his classic book “Pit Bull”:

“Every trader faces it. Only the winners know how to handle it. The dreaded losing streak rears its head every so often and attacks every great trader. It eats away at your judgment; it saps your confidence. Sometimes it can take you so low that you think you’ll never get out. You’re sure that something has gone wrong, that you’ve lost your touch, that you’ll never be a winner again. When you’re in the middle of it, you think it is never going to end, but mostly, your judgment and rhythm are off and what you have to do is stop and regain your composure.”

My Experience

In my worst period of trading I had an unbelievable losing streak. I lost money every month (except two small monthly gains) for 16 months in a row and lost 57.8% of my capital. That is easy to write, it is easy to read but it is hell to live through. It wasn’t even the money that was the worst thing. The worst thing is that I was woefully unsuccessful in an area that I thought (and other people thought) I was very successful in. That was a huge blow to my pride. In my book I go through it in detail. But it was a LOT of money. It was my “going broke” trade (a “going broke” trade is a common occurrence among successful traders. It is the trading period after which they finally realize the implications of risk).

What can we conclude?

If you are going to trade you are going to have losses.

If you are going to trade big you are going to lose big.

If you are going to trade other people’s money you are going to lose other people’s money.

You therefore need to develop strategies for:

  • Money management in losing periods;
  • Dealing with the stress of losing money;
  • Dealing with the loss of confidence in yourself and your trading system.

Just as a matter of interest here is a list of over 40 people who have lost more than US$100m trading:

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