Is your trading giving you whiplash?

Here’s a problem that many traders will recognize: the ups and the downs …

Do you have to put up with them? Or is there a better way?

Are you enjoying the ride?

We’re constantly being told that trading has its ups and downs … that we have to take losses on the chin … and that the best traders look at winners and losers with the same detached attitude …

I expect you’ve heard all this before. No doubt I’ve gone on about it at length in a Bulletin in the not too distant past.

And of course, it’s all true.

But, what I want to look at today is a bit different.

I want to examine why, too often, these ups and downs that we’re told we just have to ride – can, at the end of the year, leave us either down overall or with close to zero profit.

Sound familiar?

You have an incredible run for 2 months … then everything you made gets wiped out over the next 2 months … And you spend the rest of the year getting thrown in and out of profit.

Sure, there is some truth in saying that this is just the way that trading goes – we have to take the rough with the smooth, and part of that is going to be suffering some drawdowns.

But, it can feel like a lot of turmoil and heartache for very little overall gain.

So, how can we give ourselves a more even ride? And one that ultimately leaves us in a healthy profit?

Making our trading less of a rollercoaster – and more like a gentle drive in a chauffer-driven limousine.

1. Look at your stakes

A major cause of these violent ups and downs is getting your staking levels wrong.

Again and again I’m horrified to hear traders approach their staking based on “how much I want to make”.

“I want to have made £12,000 by the end of the year, so I’ll need to start staking at £5 / point.”

If your trading ups and downs are making your stomach churn – it might be an idea to reduce the percentage of your fund that you’re risking on each trade. Say you were risking 2% at the moment – you could reduce that to 1%, and use the other 1% for an investment with less profit potential, but also less risk potential.

2. Are you cutting your losses?

A good way to limit your losses is to set yourself a maximum drawdown. You can do this on a daily, weekly, monthly and yearly basis.

For example, you might say that after three losing trades, you’ll stop trading for the rest of the day. (If you’re trading at 2% risk, that means a maximum daily drawdown of 6%.)

Or, that if you’ve suffered a drawdown of 20% in a month, you’ll stop trading for the rest of that month.

To many traders, this seems illogical.

You might say: “The next trade could be the winner that’ll get me back in the game.”

Listen to that again …

“The next trade could be the winner that’ll get me back in the game.”

Can you hear the sound of a desperate man at the roulette table?

The wiser trader knows that there will always be another day … another chance … And there’s no reason why that chance has to be taken right now.

But by limiting the amount you can lose in a single day, you may have incredible days when you make 15% profit on a good run. But you can never, never have a day when you lose more than 6% of your fund.

It’s just another way to tip the scales in your favour.

3. Are you stuck in a vicious circle?

The final issue that could be at work here is a vicious feedback loop – where our behaviour is making the ups and downs more and more extreme.

How do you react when you’re experiencing a good run?

Do you get a bit slapdash with your entries and your stop levels?

Do you up your staking levels?

Do you let trades run for longer than you should?

All of these things will mean that when that winning run fizzles out, a few losing trades can hurt you more than they should.

If you up your stakes after a winning run – just a handful of losses could wipe out weeks worth of carefully gathered profits.

If you’re constantly pushing and pushing for bigger profits by leaving your trades to run and run, you’re likely to suffer more losing trades when the market doesn’t hit your targets.

And being prudent with your entry levels and stop losses is one of the most important ways we can increase our chances of winning – and protect ourselves against nasty losses.

All these things create a type of feedback loop – where the problem of rollercoaster ups and downs is exaggerated by our own trading behaviour.

The result can be that the ups and downs get more and more violent, until we’re wiped out by a serious drawdown, or simply lose faith in trading, believing it to be more trouble than its worth.

However, it’s a shame to throw in the towel on our trading, when in fact, all we really need to do to turn mediocrity into success is to tone down some of our staking levels … to consider applying a drawdown limit … and to reign in our enthusiasm when we’re on a winning streak.

And then enjoy the benefits of our long-term profitability!

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