How How to to deal deal with with aa losing losing streak streak
In this scenario, the position trader hopes that the initial draw-down will be repaid many times over, however, in the long run by an eventual multi-bagging leveraged profit. I’ve personally seen spread bet portfolios fall by 50% like this, and then rise by a factor of 30! Providing you trade within your means, you may be comfortable taking a 50% draw-down en route to a several thousand percent profit. Tip: Assess your draw-down against the realistic upside potential, and don’t draw down by a massive 90% if you’re pursuing a modest 10% profit. In relation to the tip just given, consider that a 90% drawdown requires a 900% recovery merely to break even. Unlike traditional investing, with leveraged spread betting this might just be possible, providing you...
Or do you have some concrete proof that your faith will be rewarded? In other words: is your “belief” based on your trust in the high priests of trading, or based on your own personal epiphany? I was lucky enough at one point to experience a 3000% return-on-investment within six months, which is equivalent to making £300,000 from every £10,000 of trading capital deployed. Since I’ve experienced first-hand that such a multi-bagging outsize return is perfectly possible, I’m happy enough — though not deliriously so — to stick with my preferred strategy in the face of the kind of draw-downs shown in my earlier graph. But only because I’ve seen it with my own eyes! Tip: Only “keep the faith” indefinitely if you have actually seen the light yourself. Trading is not a matter of life and death... it’s more important than that!
Keep the Faith When you encounter a losing streak and your draw-downs are mounting, you can do one of two things: switch to a different strategy, or keep the faith. It’s hard to know which is best. Really hard! You may be suffering because your strategy isn’t working, or because it simply isn’t working “yet”. If you decide to “keep the faith” and hang on in there with your current strategy, are you doing so merely because your favourite trading author (allegedly) runs this strategy... or perhaps because your favourite investment web site promises that you can never go wrong as long as you “buy and hold” (through thick and thin) for the long term?
Stop Digging! When you’re losing money and drawing down your trading funds, there is a temptation to “bet bigger” in order to get “even” with the market and recoup your losses even quicker. This kind of Martingale strategy is doomed to failure unless you have infinitely deep pockets that allow you to stay solvent longer than the market can stay irrational. Most successful traders will agree that it’s much better to reduce your bet sizes when you’re losing. So this leads me to my... Final Tip: When you’re in a hole, stop digging!
About the Author Tony Loton has authored the books “Stop Orders” published by Harriman House and “Position Trading” published by LOTONtech, and he runs the spread betting web site at www.betterspreadbetting.com
December 2012
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