Wrote this months back, I have been working on the issue ever since.
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Needing to get even.
I find a problem of mine tends to be that when I lose a few times in a row and now need to make it back up, I feel like I have to hold on and make it back up with the next trade. If the next trade is a loser, well then I feel compelled to hold the next one even longer because something in me says "Get it all back and then some".
I am trying to help myself not do that and I want to point something out.
The statistical edge of a system or method lies in a slight advantage over the long haul of hundreds or possibly thousands of trades. In my particular method, the approach is to choose a zone of price and straddle it with a buy and sell area. Losing most of the time is expected with this method as it counts on price to eventually move far away from the zone and make up the losses. However, the key to its edge is to limit risk and have a larger average winner than its average loser.
One thing that I seem not to take into account is the average daily range. If I am trading a zone that is 5 pips wide and the daily range is 100 pips, losing 10 times in a row would mean that I have to hold on to the next trade for 50 plus pips. With a 100 pip range that is less likely to happen. The more you lose, the less chance there is of the market going the distance you need it to to gain what you need back.
Lets look at this closely. If I lose once, I now need the market to move 5 pips in order to get me back to break even. If I lose 4 times, I need the market to move 20 pips to get back to break even. And as stated before if I lose 10 times in a row I now need the market to move 50 pips to break even. What if when I had lost 4 times, the market moved only 15 pips in my favor and simultaneously reached a significant area of support or resisitance signaling that may be all the market is willing to give me in the short term?
The natural motivation in me would be telling me "I need it to go at least 5 more pips!", but that mindset is not thinking in terms of probabilities anymore. Yes you could argue that "if one can survive the beating long enough that the market will eventually move enough", but you really need to come to the market with a precise plan and know what YOU are about. If your intention is to battle it out for a long time just to establish a long term entry at a particular price level... then the level at which you are going to take punishment is expected to be a lot. However, if you intend to make short work of your trading day and come back the next day when a different opportunity may present itself, you need to think "long-term" in a different way.
If I lost 4 times with a drawdown of 20 pips and the next stopping point for the market seems to be only 15 pips away, perhaps I should take the 15 pips, lose 5 for the day and come back tomorrow.
If I think in terms of realistic movement for the pair I am trading coupled with good risk to reward ratios, its best not to dig too deep a hole at once trading with only that days movement in mind.
If the market stopped at +15 pips on that 5th trade, reversed and stopped me out for another 5 pip loss, I am now down 25 pips for the day. Possibly more depending on what the market does next.
If I take the 15 pips the market gave me and end the day down only 5, the probabilities of establishing a new price level with a new day and a new risk to reward ratio put the odds in my favor of capturing more pips during the earlier trades of that day. It prevents the loss from growing too large at once, which can seriously hinder my mental state AND require the market to move beyond what it may be willing to give me.
Stop thinking in terms of what you need to get back TODAY, because the market is not aware of that. Even if it were, that would mean nothing to the market. The market is filled with thousands of people with their own personal goals that they are attached to just like you. It makes no difference who you are or what your goal is, the market does not care.
So, coming into a new day the first trade of the day may be a 20 pip winner out of the gate. now I am up 15 pips and come back tomorrow for the next opportunity. If I stayed in the battle trying to get the 20 pips back yesterday, my losses may have grown to well beyond the minus 5 I left with, which would mean that today the 20 pip winner might have turned into a loser because I still needed more to make up for yesterdays losses.... See the difference?
Ending the day at a loss and ACCEPTING it and moving on, is actually part of being profitable.
Try and think of when you trade normally. If you have been building gains in your account for the last week, have those profits been taken according to what the market was willing to give you? After a loss, try and realize that if you keep trading correctly the way you have, you will continue to build up your profits little by little.
Accept your account balance as whatever it currently is. Try and imagine that this is the amount you deposited initially, or if you are still at an overall profit, realize that you took an even smaller number than you are looking at right now and made it grow to that number through taking profits when they were made available.
Ask yourself how many home runs you scored while raising your account to that level. Probably not many right? So realize that you do not need to try and make back what you lost all at once. If you adhere to what got you there in the first place you will not only get there again, you will far surpass that mark eventually.
Consistency is key. Fortunes can be built on it. And the best way to lose consistently is to aim soley for home runs.
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