Everyone wants to be right 100% of the time in trading. Why do you think that there are so many people trying to sell dodgy trading systems with 97 -98 – 99 – 100% success rates? Humans generally don’t like to lose and experience pain so we’ll do anything to avoid it, especially when it’s connected with us losing our hard-earned cash! I’ve yet to meet anyone who was 100% right over a consistent time line. Taking losses is part of the game.
“You never can get through any martial combat without taking some impact, which is a lot like trading. You can never get through a trading week without taking some losses. The determination of mind and body, united in purpose, is a very formidable weapon.” – Interview with Bob Watson from Real People; Real Traders.
Today I want to talk about dealing with clusters in your trading. What does that mean? I define it as periods of consecutive wins and losses outside the size of your normal expectancy. I’m talking about whereby you can have 5, 7, 10, 12+ wins and losses on the trot in your trading. Now of course everyone loves winning 10-12+ times on the trot, those are the happy times! However the flip-side is when you lose 5, 7, 10, 12+ times on the trot and invariably how you handle that natural draw-down.
Firstly you need to understand the expectancy of your system from both terms of hit rate (the number of winners vs losers) and Risk:Reward (how much you actually win on a profitable trade and how much you lose. From this you can begin to gain an understanding of your expectancy. There’s no easy way around this, you have to keep good consistent records. Pure and simple.
For example last year I was trading with a hit rate averaging 65% and R ratio of 1.3. Happy times (though I admit I’d have liked my R ratio to be a good deal higher). However even though on a hit rate average of 65% (meaning roughly 2 out of 3 trades were profitable) I still had several clusters of 5 to 7 losing trades on the trot.
When you’re experiencing such a losing streak it can be hard on the ego and your confidence. You can lose confidence in both your system and yourself. A lack of discipline commonly manifests itself in the failure to stick with a perfectly good trading idea through natural periods of draw-down. All traders will experience clusters of losing traders. They should expect them. As with any business, there are times of famine. But the frustration and the temptation break people’s discipline, they deviate from the plan and flit from strategy to strategy without giving them time to flourish.
Being able to trade through those periods of draw-down brought on by clusters eventually gave me great confidence. Even though the I was on a losing streak I knew from my records that overall my trading was profitable and my next great winning streak was around the corner. Keeping great records and being able to analyse and debrief my records gave me great confidence that I understood my business and was able to take steps (like scaling down position size) to enable me to trade through the rough patch.
When you experience a cluster; either the market is out of kilter or you are out of kilter. Let me give you some advice; it’s probably the latter. Whilst the market does indeed change and go through periods of decreased opportunity the likelihood is that you’re probably doing something to assist in your cluster. I like to use Tim Gallawey’s (The Godfather of Coaching) STOP tool.
Organise your thoughts, and
A period of quiet reflection and analysis of what’s happening in and outside of your trading life may hold one key to your present situation.
So your take-away points should be:
1. Do you keep good records. Honestly?
2. Do you know your performance metrics?
3. Do you understand the likelihood of experiencing clusters in your trading. What can you do to prepare yourself? Can you build your own STOP tool?
4. What can you do to maintain high levels of confidence during such periods?
I hope this helps.