How Many Losing Trades Before You Quit Trading

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We are all going to have losing trades.  The only way to avoid a losing trade is to not trade.

Since you intend to make trading a career, not trading is not an option and a question that’s come up in our trade room has been “How many losses would you take before stopping?”

It is understandable why anyone would want and need to know the answer.  It is a question everyone should ask but many don’t and eventually over-trade their account into net zero.

So how do you deal with this before excessive trading drawdowns wipe you out?

“Learn to take losses. The most important thing in making money is not letting your losses get out of hand.” – Marty Schwartz

 

When Do You Stop Trading?

The tendency is to come up with an answer that has some sort of  ‘feel good’ or perhaps more accurately, ‘stop the pain’ type of remedy.  I would venture to say that most traders will come up with a response that is motivated by an “instinct to survive” necessity.

HOW MANY LOSING trades

The problem is, that this type of response, which is a perfectly natural thing to do, is wrong!  It is a response that puts your personal needs before the needs of your trading.

Trading and markets are not human.  But you are.  The intuitive thing to do is to stop the bleeding, so that you can survive.  But success in trading, typically requires the counter intuitive action.

The only way to really come up with the right response is to be able to go back and analyze a lot of trades that would have been generated by your method.  The responsible trader, or should I say, the professional, serious trader who truly has the will and desire to succeed and make money at this endeavor, should do a good amount of  ‘foundation building.’

There is a way to come up with the right answer to that question.  

That answer can only be derived from extended back testing of your trading system and a deeper knowledge of not only wins and losses, but the overall expectancy of your trading plan and trading system.

If you take the time to do that, you will learn a great lesson that pertains to the ongoing relationship between wins, losses and how the combination of the two, help to create your equity curve.

Without that knowledge, you’re just trying to swing a bat at fast pitches in the dark, with your eyes closed.

 

“In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” -Peter Lynch

 

You Will Have A String Of Losing Trades

5 losses in a row?  That doesn’t happen often with a good trading system, but it does happen.

6 in a row is possible.   So is 25.

Back in 2009, when we were trading the Russell E-Mini in the live trade room with a system that was posting a solid 62% winning percentage, we experienced a very interesting thing.  Van Tharp taught us that even a system with a high winning percentage has a 1% chance of catching a 9 to 13 trade losing streak.

Did that fact just send shivers down your spine?

Futures Trading Drawdowns

At the 650th Russell E-Mini trade, we started on a path of an 11 trade losing streak.  There was no way to know at the time we were in the midst of that, trade after trade.

What do you think happened next?

 

Traders Quit The Trading Room During A Losing Streak

That’s right.  We had some traders decide to cancel and the way we saw it, all the loose fruit was shaken from the tree.  Put it in perspective:  it took 650 trades to hit a losing streak bad enough to shake people out.

Did they forget about the previous 649 trades that added to their trading account and up-sloping equity curve?

Once we took some time to think about it we thought “Who could blame them as they’re just human beings responding in a natural, intuitive way”.  The instinct for survival is very powerful, obviously, and they were attending to ‘their’ needs.  The need to stop the pain so that they could continue being.

But what happened next was so predictable.

No, the system did NOT break down.  A 62% winning percentage over 650 trades didn’t happen by accident.  On the 12th trade, the losing streak was broken.
649 TRADES

 

Winning Streak Begins And New Equity Highs

Our Russell E-Mini trading plan proceeded to embark upon a 16 trade winning streak and  Brand New Equity Highs!!  The system ended up posting a NET 400% annual return! Yet so many just bailed out, tossing the baby out with the bath water because they didn’t have the overall vision.

The needs of their trading were pushed aside to accommodate their own personal and psychological needs.

You have to become involved with the win/loss column as it relates to the equity curve.  It’s a trees from the forest type of thing.  Don’t get lost in the trees and lose the broader perspective vision of the growing forest.

Those that go through the trouble to create a strong foundation before committing real money, will be in a much stronger position to succeed as a trader because they understand the potential that awaits.

Studying the win/loss column will provide the best and most intelligent answer to the question, how many losses.  Anything else is most likely a very human, and very wrong answer.

 

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2 Responses to “How Many Losing Trades Before You Quit Trading”

  1. Chris Sanders

    I was listening to one of your videos about selling options by a Mr. Finks( i believe) and was unable to finish, I have been hunting it all morning and can’t find it, was wondering if you could send me a link so I could finish it, I was very interested in what he was discussing.

    Reply

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