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Trading Education Posted by Team Topstep October 31, 2022

5 Things To Do When Trading On A Hot Streak

Stadium Cheers

If you’ve been trading long enough, regardless of how successful or limited your results have been, you likely have encountered some form of a winning streak. 

What you consider a winning streak might be relative. For some, it could be five winning trades in a row, while for others, it might be twenty. For one person, it may be more about a profit streak than how many actual trades have ended consecutively in the green. Of course, we all know that losing streaks are more common and much easier to come by, but if you trade long enough, at some point, you’ll enjoy an unforgettable ride of profits.  

Some of my own winning streaks are pretty memorable. For instance, in 2011, I had more than twenty consecutive trades end in profit. Then there was a time in 2014 when I won 45 out of 50 trades. Those were great feelings, to say the least. 

Even if you’ve just won three or five trades in a row for the first time, we all share a similar feeling when we’re on a winning streak. There is a sense of fulfillment and validation. For many of us, there was always someone who doubted our ability to succeed at trading. Others of us questioned ourselves. A winning streak can make us feel that we’ve moved beyond the beginner stage and are now more experienced. Or, if we were already experienced, the right set of winnings can make us feel that we are now professional.  

Simply put, when this happens, it can feel like we are on top of the world. Then, however, suddenly, the stark reality hits us – if we are on top, there is only one logical direction to go, and that’s downward. 

5 Things To Do When Trading On A Hot Streak

We are all aware of how it goes. Unless we have developed some “super system,” which is a most unlikely circumstance, then eventually, reality will set in, and we will experience losses. In fact, one well-known trader who made a significant amount of earnings and whose experiences were featured in a publication said he frequently met his most considerable losses following his largest gains. 

A winning streak may be random, but what occurs afterward is less so. A psychological effect of winning tends to cause us to turn off our internal risk monitors and make us grow too comfortable. When we indulge in such behavior, disaster often follows. 

The importance of today’s article is to outline the correct and healthy behaviors that should follow a win streak. These are the types of responses that can help us learn how to continue our gains. Most importantly, they are the traits that will permit us to create a cushion against the substantial risks that accompany tremendous gains.  

Below is a list of five things to do when you find yourself on a winning streak. This list is hardly a stand-alone that covers every significant consideration; however, it will at least provide you will some clear direction and good advice that you can develop further. 

Responsibly Handle Size 

I’ve read certain gambling strategies that suggest a person on a winning streak in a casino should be adding to their size to catch momentum. Perhaps some elements are worthy of consideration in that context; however, gambling is not my area of expertise. What I have observed is that traders on a hot streak start thinking about the “what ifs.” What if I had larger size? Then, I would have greater gains. 

One problem with a winning streak is that we begin to feel less vulnerable, and accordingly, our risk management skills become suspect. I would encourage you not to increase your size substantially. 

However, I also see the merits of increasing your risk tolerance, but I advise you to do so in small progressions. I believe the best way to add to your size is in a way that doesn’t necessarily add to your risk. To continue the analogy of casino behavior, when you are on a winning streak, you reach the place where you are effectually playing with house money – in other words, profit. How you handle house money is critical both in trading and gambling.

The casinos realize that gamblers do not tend to be responsible. If they can keep a hot-streaked gambler at a table long enough, eventually, they will not only return the casino’s money but also likely a significant amount more. 

When trading on a win streak, the most responsible way to add to your size is by using your recent earnings to impact your leverage. This way, if you hold fast to the rule by going “all in,” you won’t be adding to your risk. However, if you use all your profit and lose, then the proceeds from your winning streak will be annihilated. So a good rule could be to put away 50% of your winnings from a hot trading streak and then add to your risk with the other half.  

The biggest pitfall to avoid after winning nine trades in a row is to assume you’ve already won on the tenth trade and increase your size to your account maximum. This leads to disaster!

Remember, Nothing Lasts Forever

I once knew a trader on a robust winning streak. It was beautiful to watch from a distance. What became concerning, however, is following two months of stellar gains, he decided to increase his personal spending significantly. Not only that, but these habits and some long-term plans prompted him to accumulate a sizable debt. 

His thinking was that his new trend was going to last forever. Eventually, his account went sideways, with no profit or loss for two months. Normally, this is sustainable; however, he had accumulated so much debt with reckless spending habits that he then had to face the uncomfortable dilemma of rebalancing his budget. 

It may be tempting for us to buy a new car or do any number of things while on a winning streak. However, having been surrounded by professional traders for nearly two decades, I’ve observed that longevity is critical. Anyone can have a nice hot streak. Those traders who have been in the game successfully for the lengthiest durations typically do not reflect their hot streak by altering their lifestyles. 

In other words, I’ve witnessed traders who lived and acted the same way, regardless if they made $10,000 for the month or $250,000 for the month. There was no difference. This is a sign that a trader has what it takes to be a market professional. 

Don’t Let the Blade Go Dull

The most impressive winning streak that I ever saw happened during a holiday week in February of 2016. If I told you the percentage gains of this forex trader in two days’ worth of trading, you would not believe me. We are talking about over 1,000% return when he hit the sweet spot. After the long weekend, we discussed his plan for the next week. I grew concerned when he pretty much assumed he’d echo the same results and approached that week without a real plan, technically or mentally. 

It was striking how quickly he grew complacent and lost his edge because he felt like he didn’t have to scrap and fight for winnings anymore. This was because his account had gone from small to quite respectable enough for full-time trading. However, the concerns I anticipated became apparent in the days to follow. This trader no longer felt a sense of urgency to compete; he was still in some adrenaline-induced rush. It was not until he gave 50% of those gains back to the market over the next two weeks that he sobered up and started sharpening his blade again. 

It’s Time To Study and Plan

Step A: Of all the things one might be prone to do or consider doing during a hot winning streak, studying is probably not the most natural that comes to mind or the most appealing. However, it could be the most important thing you ever do. Sometimes, winning streaks are purely random and coincidental. When you benefit from the luck of the draw, that is fantastic. 

However, by studying your habits, you will be able to consider whether there was anything that you did differently that enabled this winning streak. Furthermore, you should engage in critical analysis of the market(s) you traded to detect if any scenarios were distinct. By doing this, you may be able to detect the factors that generated your win streak.

Step B: There is an additional step to take, and that is to plan for success. If you are able to determine why your winning streak occurred, then I suggest you synthesize this material, create a rule and potentially a system, and see if you can replicate it in your chosen market and possibly other markets.

Again, you cannot program random luck. However, if you can measure tangible differences in yourself or in the markets that enabled your success, then you can make the most of your win streak and maximize further opportunities. 

Enjoy It

Okay, I have articulated all the responsibility that accompanies winning streaks. However, don’t forget this major step: take time, breathe, and absorb the experience. In other words, enjoy the season for the moment. Sure, don’t fall into careless spending habits, but by all means, spend some of your profit! Don’t let your blade go dull, but do take time to relax. Make sure to do your research and preparation, but also plan to have fun.

I hope that you are reading this because you are currently celebrating a hot streak. More importantly, I hope that you incorporate these relevant elements into your plan going forward. Until next time, trade well!