History has recorded many great winning streaks.
Whether they were made in business, team sports, individual sports or other areas, they all had some common characteristics. They had a strong foundation, a belief in what they were doing and they took it one step at a time.
In trading, we can develop a winning streak if we decide to not always categorize winning with profits.
Success brings about more success, however if we decide we are a failure, then failure can also bring about more failure.
After struggling at the end of October, the S&P 500 has finished higher on every single trading day so far in November. This marks the 16th 6-day winning streak for the S&P 500 over the last ten years. As shown below, the last four 6-day winning streaks have been met with declines on day seven.
Trading coach Van Tharp has a trading game he lets his students play. In a class of 20 to 30 people he will pull different color marbles out of a bag to determine whether the classes trades are winners or losers and by what multiple. There are overall more winning marbles than losers marbles in the bag making this hypothetical trading system a robust system. In the long term the traders playing the game should make money. While the class all receives the same win and loss results during the game some players blow up their account to zero very quickly and others end up with great returns during the game. What is going on? What makes the difference? Each individual traders bet size and the amount of capital at risk determines whether they win or lose even though they are all getting the same trading results in wins and losses. The traders that bet too much and lose at the beginning of the game blow up quickly, the ones that bet big and win in the beginning start in the lead but blow up their accounts later. The best risk managers in the game win primarily by simply surviving their first consecutive string of losses while others do not. The winners also are able to grow their bet size during winning streaks as their capital grows. They bet more as they win and less as they lose by defining a percent of their total capital as a risk multiple that they can expose to losses.
So you see in the trading game, after a trader has a robust system it is still the best risk managers that win in the long term. (more…)
Always take your profit too soon.
Sell too soon. Don’t hope for winning streaks to go on and on. Don’t stretch your luck. Expect winning streaks to be short. When you reach a previously decided-upon ending position, cash out and walk away. Do this even when everything looks rosy, when everyone else is saying the boom will keep roaring along.
The ONLY reason for not doing it would be that some new situation has arisen, and this situation makes you all but certain that you can go on winning for a while.
Except in such usual circumstances, get in the habit of selling too soon. And when you’ve sold, don’t torment yourself if the winning continues without you.
When the ship starts to sink, don’t pray. Jump.
Learning to take losses is an essential speculative technique. MOST never learn it. Take losses at once and move on. Take small losses to protect yourself from the big ones.
Beware the 3 obstacles to jumping ship:
– fear of regret ( that the loser will turn out to be a winner when you’ve bailed-out )
– Unwillingness to abandon part of an investment ( become willing to abandon )
– Difficulty of admitting you made a mistake.
Trading provides one of the last great frontiers of opportunity in our economy. It is one of the very few ways in which an individual can start with a relatively small bankroll and actually become a multimillionaire. Of course, only a handful of individuals succeed in turning this feat, but at least the opportunity exists. A rigid stop-loss rule is an essential ingredient to the trading approach of many successful traders. Winning streaks lead to complacency, and complacency leads to sloppy trading.
