No matter how successful a strategy has been, there will be times when it stops working.
Market conditions can change… or the market starts behaving irrationally. And that means even the best trade setups can fail.
It can lead to great frustration and be tough to ride out.
Some folks might abandon their strategy. Or if beaten down too much, they may even give up trading altogether.
But when you’ve been around the markets for as long as I have, you learn to accept that it is just part of the game…
Nothing in the market goes up (or down) in a straight line. And neither does your profit and loss account.
Like the markets, your trading account will move in cycles.
Today, I want to share how to get things back on track when you’re going through a tough time…
Start Fresh
Even the most experienced market veterans go through rough patches. I’ve been through plenty in my 40-year career.
And my hedge fund was ranked in the top 1% of hedge funds by Barron’s multiple times!
But I learned that rather than let the frustration get the better of me, often the best course is simply to take a step back.
That goes against human emotions. We want to double our efforts… to work even harder and take more trades to get ourselves back on track.
But rather than battle it out, it’s often better to wipe the slate clean. When I was going through a rough patch, I would close out all my positions and start fresh.
Trying to ride out trades that aren’t working isn’t only frustrating. It can also be a distraction, leading you to miss out on more promising trades.
That causes the negative cycle to spiral even further out of control…
So here’s what you do…
Limited Funds
When going through a rough period, the first thing I’d do is reduce my trade size.
Often that meant halving my position. And if that didn’t work, then halve that position size again.
The moment I was down by 2.5% in any month, I would cut all my positions and start over the following day.
Remember that your trading capital is a limited resource. Once those funds are gone, you’re out of the game.
You can always build bigger positions when the cycle turns and you start to regularly bank profits again.
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Fine-Tuning Your Strategy
You can always fine-tune your strategy. That can be tightening your trade entry criteria or adjusting your stop losses.
And you bank your profits earlier. That enables you to get back into the habit of making money.
Plus, if you like to trade several different markets or stocks, you might cut that back to just the one with which you are most familiar – where you’ve performed the best.
But perhaps the biggest thing to remember is this: You don’t have to trade.
If things don’t make any sense, then you can sit on the sidelines.
You can’t be a trader if you’ve burned through your account.
In your trading career, you’ll inevitably go through some rough patches. You’ll likely go through these cycles plenty of times.
So you can’t let them put you out of the game.
Instead, identify when things aren’t working as soon as you can. And then take a step back.
If you follow these steps, you’ll be on the quickest path to turning things around.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict