Home › Market News › Trading Through Hot & Cold Streaks
One of the keys to successful long-term trading is consistency. While some traders may have a personality that compensates better for wild market swings, most of us work best at a steady pace. However, there are no guarantees in trading, except that the markets will test your every weakness; whether it be your trading strategy or your personality.
Traders have to learn to think in patterns that are often different than how your family, neighbors, and friends think. Unlike most of them, when it comes to our trading profit, no one signs over a check every week with a pre-determined and agreed-upon amount. No, for traders, we must venture into the unknown, and sometimes when we have worked our hardest, is when we see no pay to show for our blood, sweat, and tears.
Inevitably, however, a trader will go on a streak. During the hot streaks, it feels like we can only identify winners; during the cold streaks, it feels as though we will never breakthrough. These are normal, and perhaps even healthy patterns of the trader’s life. Today we will look at some tips on how to respond to these types of streaks.
If you are in trading for the long-haul, eventually you will experience an unexplainable streak, and at some point, you will have to deal with the psychological responses to these streaks. I’ve seen traders with strategies that won +90% of the time, albeit on a very low return on risk. However, their confidence was in the results of a backtest suggesting that a string of four losers in a row was astronomically low. Therefore, they never prepared for a cold streak.
It is well attested that “past performance is not indicative of future results,” and multiple times I’ve seen things happen that were never supposed to occur. Likewise, I’ve seen traders with a much more average win rate experience two dozen wins in a row, with a strong return on risk rate, which is something that was not supposed to happen to that trader, whose model accounted for success only about ⅓ of the time.
The human experience suggests that we have short memories and become victims of recent trends. The most natural thing that happens to traders who are on a streak is to assume that the trend will last forever. Newer traders are especially prone to this type of reaction.
One trader I know worked through two years of losses before stringing together consecutive winning months. Then, he got hot, winning on about 45 out of 50 short term trades. He then quit his day job to trade full-time, thinking he would be able to trade much more frequently and become a millionaire in short order. I probably don’t have to tell you what happened next. A month later he blew up his account, and less than a year later, his wife filed for divorce.
A well-known trader once told me that his largest losses came following his best gains. When on a winning streak, the same adrenaline effect occurs that is produced by gambling. There is a tendency for logic to be disregarded while becoming trapped in the moment. When this happens, traders think these types of gains will last forever.
Another side effect I have sadly observed is from traders who suffered an extreme adrenaline rush during win streaks; they became addicted to the euphoric high, and when the markets were closed they picked up harmful habits to compensate.
A cold streak can be very disheartening, leading to many discouraging thoughts. During these times, traders are tempted to throw in the towel and give up. Here are a few tips for ending a slump.
The last rule applies to every trader, for hot and cold streaks: Talk to someone! Be in a network of traders that can support you!