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Drawdowns happen: how to survive a series of losses?

There are no ideal techniques of trading on financial markets, even the most famous traders experience the streak of fails. In these situations, experienced speculators often get nervous, while the newcomers are all ready to panic and desperately waste the remaining capital ... In fact, these kind of situations are quite natural, and we will now describe how to deal with it as painlessly as possible.

How do you explain a losing streak?

Traders in all financial markets experience the losing streaks, and even the timeframes do not matter in such cases. Do you trade "long terms" or practice “day trading” - still, your profitable strategy may eventually show itself as the most unprofitable. Expert traders would usually comment, that "the system has entered a money-back period." Certainly, you should always double-check the orders to ensure their compliance with the chosen strategy. Moreover, it is necessary to calm down a little and take the emotions under control.

Nevertheless, how is it possible to explain that the ratio of your profits and losses were pleasing the eye yesterday, but now 9 out of 10 trades end in painful stop-losses? In fact, there is a simple explanation for this phenomenon: the probability cannot be at a constant rate. For example, what in your opinion is the probability of "heads" or "tails" in a simple coin toss? Logic might suggest to you the answer is "50%", but try to hold this experiment in practice, and you will realize that the coin may fall persistently on one side many times in a row.

The main thing – do not panic

Just like in the case of an above-mentioned example with the coin toss, any trading strategy has a probability. Even if it is higher than 50 percent – the probability laws may repeatedly make you richer, or continue to lower your deposit. Experienced traders tend to survive the losing streaks more relaxed, because they know how to deal with emotions and not make mistakes, when "recovering" the deposit. In addition, the money management allows the experienced traders to go through a long period of failure.

It can be more difficult for beginners in this respect, because of their dreams of high incomes from trading in the currency exchange, which cannot be combined with the fact that sometimes you have to bear the loss. For some traders, the losing series may become a real stress: these traders start changing the trading systems, in some cases they even put away the trading strategy and start trading intuitively in order to try getting the deposit back. Of course, this does not lead to a good result. It is much more efficient to make a small break in trading and analyze the mistakes - if they actually occurred. If you believe that all orders have been placed appropriately, but the market at this time behaved unpredictably - continue to work and start reducing the size of the order and this will help restore the confidence.

Trading systems resistant to unprofitable series

Imagine that you have two trading strategies, showing the same profitability during testing. In the first strategy, there is a higher probability of winning transactions - for example, 80%, however the risk/profit suggests that this strategy is rather risky. The second strategy has a lower probability of a successful trade - less than 50%, however the level of potential loss is less than the calculated profit. What kind of system would you choose?

Without a doubt, most of the beginners will tend to choose the first trading strategy. Bearing in mind that the probability of a profitable trade is 80%, the system will eventually fail. Further 5-10 consecutive failures would be fatal for the deposit. On the contrary, if the profit potential is higher than the risk, as in the second trading strategy, then the number of failures in a row may be easily returned in one successful trade. These systems are most persistent and they are not troubled by any "losing streaks."

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We would like to remind you that although trading of derivatives on margin may offer many benefits, it is important to note that it also carries a high level of risk. Please click here to read our full ‘Risk Disclosure’ and ‘Risk Disclosures for Financial Instruments & Investment Services’.

RISK WARNING: Trading of complex financial products, such as Stocks, Futures, Foreign Exchange ("Forex"), Contracts for Difference ("CFDs"), Indices, Options, or other financial derivatives, on "margin" carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss of some or all of your initial investment and, therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading these markets, and seek advice from an independent financial advisor if you have any questions or doubts. Please carefully read our full "Risk Disclosure" and "Risk Disclosures for Financial Instruments & Investment Services". FXFINPRO Capital is the trading name of PFX Financial Professionals Limited, a limited liability company formed under the laws of Cyprus, registered with the Registrar of Companies in Nicosia, Cyprus, under nr. HE 237840 and regulated by the Cyprus Securities and Exchange Commission with license number 193/13.
The CIF license of PFX Financial Professionals Ltd has been suspended by the Cyprus Securities and Exchange Commission until the 24th of December 2016. Please click here