Dangers of Winning Streaks
Winning Streaks
A few weeks ago, I wrote an article on losing streaks and how dangerous they can be. However, winning streaks can be even more dangerous and can lead to losing streaks.
Over the past few months, the market has been moving abnormally, due to the financial crisis. If you take a look at some weekly charts, you will see a major trend that moves mostly in a single direction. With some indicator based methods major trends mean easy pips. The problem is markets change because they move in cycles. Eventually, we are going to see a slowing down of momentum and certain indicator based methods, that worked well in trending markets, will begin to fail.
There are many traders out there riding on a high now because they have been on large winning streaks. So it's probably the right time for this article. Winning streaks are dangerous because:
- They can fool traders into thinking they're better than they actually are.
- They give traders that 'I am invincible' feeling.
- They tend to make traders forget their money management and raise their risk.
- They cause traders to overtrade because they don't want to miss the next big trade.
Winning streaks can be a major pitfall for newbie's. After winning trade after trade it's hard not to get carried away and think you're some kind of super trader. When that overconfidence kicks in the problems start. It usually goes something like this:
- Winning streak
- Trader gets cocky
- Trader starts risking more because they think they cannot lose
- Trader takes a hit and loses a few trades
- Trader falls into a losing streak
- Trader says bye to their money
How not to get Sucked in
It's simple, do not let yourself get carried away.
In my trading I average 8 out of 10 winning trades. In months where market conditions favour me, and I am on a winning streak, I can win 100% of trades, for weeks on end. However, I know that sooner or later market conditions will change and my win rate could drop down to 6 out of 10. Just like every trading method mine performs better in certain market conditions.
If I let myself get carried away then when market conditions change I could be in trouble. So how do I protect against having a winning streak turning into a losing streak?
- I do not raise my risk: I always keep my risk the same. If I am winning trade after trade I never raise my risk to make more money. As I have said in previous articles trading is all about discipline. Keeping your risk the same when you're in a winning streak is all about discipline.
- I do not concentrate on streaks: I do not care if I win 10 trades in a row. I look at each trade individually. I know that each trade is unique and that market conditions can change at any time.
- I stick to my targets: I have targets and I stick to them. My target is to average 100 pips per week. When I hit my 100 pip target I usually stop trading. I never let myself over trade just because I am in a winning streak.
I am sure your goal is to grow your account long term. So don't let the prospect of short term gains kill your chances at long term success. Successful traders do not let themselves get carried away with winning streaks. « Previous Entry Next Entry »
