Losing Streaks in Forex: Causes and How To Escape Them

Losing streaks are part of the journey in forex trading as every trader is bound to experience losses at some point. Not even the best Forex traders are exempted from losses.

If you are experiencing a losing streak, don’t doubt yourself, and do not let negative emotions take over you. In this article, we will clearly explain the meaning of losing streaks, its causes, and how to escape a losing streak.

What are Losing Streaks in Forex?

Losing Streaks as the name implies is a situation, or a period in which a Forex trader experiences prolonged consecutive losses, without any wins in between. Any number of losses ranging from two to any specific number without any win in between is a losing streak.

Losing Streaks
Losing Streaks in Forex

Also, the number of consecutive losses faced by a Forex trader doesn’t always weigh down on his trading account balance. What I mean by this is that a two-losing streak could be as bad as a four-losing streak. We will explain below.

A More Detailed Way of Measuring Losing Streaks in Forex

According to EarnForex, there are three methods of measuring losing streaks. Two out of these three give Forex traders deeper and clearer quantitative information concerning their losses. They are:

1. Measurement by Number

This as explained in the definition above, is the conventional way of determining losing streaks. Here, you just count the number of consecutive losses without paying attention to the amount involved in each of those losses.

This is helpful, but at the same time generic. As it lacks detailed information regarding the amount of money the Forex trader has lost.

2. Measurement by Size

In this method, the actual amount lost in a losing streak is calculated by simply adding up the individual amounts of each of those losses.

Let’s take for example: a losing streak of 3, and a losing streak of 5. The first streak may have a total loss of $400, and the second may have amounted to just $250. Which of these two do you think would be more devastating to a Forex trader?

The first one of course! Despite the lesser losing streak, more money was lost. Therefore, every reasonable trader would prefer to lose only $250 with a five-losing streak, than to lose $400 with a three-losing streak.

Some trading strategies may have a very high risk-reward ratio of up to 1:10. This usually requires a very tight stop-loss. Hence they may experience many tiny losses and eventually one huge win. In such a case, the losing streak is irrelevant as a very small amount is lost compared to the profit.

But then again, this is just a measurement expressed in dollars. There is no information as to how long it took between one loss and another. So here comes another system of measuring losing streaks.

3. Measurement by Time

So far, we have talked about the normal counting method, and also the method of calculating actual amounts. But we left out the time factor. This type of measurement involves calculating the time frames between the first and last loss. It is important because it can tell you the technical level of a Forex trader.

Example. A Forex trader undergoes a losing streak of 7 (in one week), and a separate losing streak of 3 (in four months). Now, the idea of losing just three times in four whole months may sound appealing. But looking from a tighter angle, you’d discover that it is not a very good performance.

The losing streak of four months shows that the trader traded three times and lost three times within the space of 4 months. (That is zero wins in 4 months!) If we were to judge the second streak with this same time frame, you’d see that he may have had a better trading season.

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This is because 7 consecutive weekly losses may be accompanied by some wins within the same space of four months!

Do you see the difference in each measuring style? All three are important because they give a Forex trader the quality information needed when backtesting or optimizing trading strategies.

Causes of Losing Streaks. Why Do I keep on Losing my Trades?

After a prolonged losing streak in the Forex market, one may want to know the reasons why these losses occur. So, from the combined experience of our team, and extensive research, we were able to come up with 7 of them. They are:

1. Overtrading

Overtrading
Overtrading causes losing streaks

According to BabyPips, the losing streak factor in Forex is mostly psychological. It can happen when a trader who has made some wins in the past becomes overconfident in his abilities and decides to trade multiple currency pairs.

It can also be a result of setting and trying to achieve unrealistic profit goals.

But here is the problem. That is the mindset of a gambler. It is almost impossible to accurately analyze so many trade opportunities in a short time.

A trader may overtrade when he becomes addicted to forex trading. For example, a swing trader who spends up to 6 hours per day looking at the charts.

So, overtrading causes losing streaks because constant trading with inadequate analysis would drastically reduce your winning probability.

2. Revenge Trading

What is Revenge trading? Brett Steenbarger, a big-time Forex trader, and author of the popular ‘Trading Psychology’ book put it this way. He said, “Revenge trading is caused by wrath, as you are angry that you lost and have the lust to make it all back quickly.”

Revenge trading can bring about significant losses because it is driven by rage, greed, and probably inexperience. The first two are negative emotions that cloud the judgment of any Forex trader.

You start revenge trading the moment you decide that you must make up for a loss within a specific time. For example, trying to cover up a 50 pips loss before the end of a day. Do not force trades!

Also, trading with such emotions can cause traders to take impulsive and unreasonable actions regarding the opening or closing of trading positions in the forex market, and hence, prolong losing streaks.

3. Setting Tight Stop Losses

A tight stop loss can be defined as a stop-loss order placed at a price that is of too little difference from the entry price. Tight stop losses can cause losing streaks because some of those prices are set without any consideration of how volatile the Forex market can get.

Let us put it this way. You may recognize a currency pair that has a high probability of appreciating, and therefore set your stop loss too close below your buy price in an attempt to manage risks.

This however could be a problem because the market can get very volatile at times. This volatility could happen just before the beginning of an uptrend, leading to a quick decrease in the price, and therefore taking you out of a trade that would’ve been a successful one.

Some trading strategies require a tight stop loss, especially strategies involving sniper entries. It can also be done to reduce risks. In both cases, the result is usually a lot of tiny losses and a few huge wins.

4. Not Having a Trading Plan

Not having a trading plan is a cause of Losing Streaks.

There is this popular and practical quote “he who fails to plan, plans to fail”. Also, “a good trading plan is to Forex trading as a business plan is to a business”. (avatrade.com).

Not having a trading plan is not advisable as it is a sure way to make losses in Forex. This is because it opens you to making subjective (or emotional) decisions, as opposed to making decisions that are backed up with reason, research, and logic.

It is that simple. Without a trading plan, you enter and exit positions impulsively. You see yourself using risk management systems that are driven by greed such as using a very tight stop loss. Once again, it is a sure, (if not the surest) way to undergo losing streaks in forex.

5. Not Following Your Trading Plan

Or better put, ‘not sticking to your trading plan’. It is one thing to have a plan and another thing to stick to it.

Plan the trade and trade the plan

A good trading plan acts as a protective hedge against making bad decisions in the Forex market. Also, it keeps a trader in check from taking excessive risks. So not sticking to your trading plan increases your chances of experiencing losing streaks.

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6. Bad Luck or Probability

Probability as a cause of losing streaks
Probability causes Losing Streaks

Welcome to the Foreign exchange market where trades are based on probabilities and some losses just can’t be avoided. Not even with the best strategies or by the most experienced Forex traders!

This means losses will always occur.

Forex Traders usually measure a strategy’s accuracy in terms of win percentage.

A 60% winning strategy simply means that out of every 10 trades, 4 losses are bound to occur. Or 6 losses in 20 trades. That is a 40% losing probability. And these losses could sometimes happen in a row, so it shouldn’t discourage you. Instead, you should brace up and prepare for the wins to come, provided that you can trust and trade the plan.

7. A Faulty Trading Strategy

While you shouldn’t keep jumping from one strategy to another looking for the holy grail. Sometimes, the fault can still be your trading strategy.

A strategy can be faulty if it allows for trading habits like not using stop losses, using very tight stop losses, trading news releases, plenty of indicators on the charts, and many more reasons.

Well, rather than trying to see if you have included a bad trading habit in your overall setup, it’s best you simply check if your strategy is faulty.

You can do this by backtesting.

Backtesting can help to calculate the accuracy of your trading strategy.

While backtesting write down your number of wins and losses. At the end of each backtesting period calculate your win percentage by dividing your number of wins by your total number of trades placed and multiplying the result by 100.

The answer to whether your trading strategy is faulty or not will show in the results.

Having discussed the causes of losing streaks, let us now progress to how you can escape them.

Stages of Losing Streaks

Losing Streaks Stages
Losing Streak Stages

From the image, we see that as a trader loses more trades his emotions heighten. It becomes less about the strategy and more about how he manages his emotions.

That is why an excellent way to break out of a losing streak is to take a break from trading and let your mind relax from all the negativity. Other ways you can break out are listed below.

How to Break Out of a Losing Streak

Below are some of the ways you can break out of a losing streak.

1. Stop Overtrading

At this point, you should have learned that overtrading is a bad trading approach. Especially when it is not done according to your trading strategy or plan. Overtrading makes it harder for you to manage your trades properly.

Entering a trade is just one part of forex trading. You still have to manage an open position properly by trailing your stop-loss, reviewing the trade, closing, or adding to your winning position.

If you are in the habit of overtrading, it is advisable to cut down to two or three trades. So you can analyze them properly, and make better decisions.

2. Stop Revenge Trading

Revenge trading as explained before is returning to the market with the mindset of quickly recovering a huge loss that was made. This feeling of revenge is normal, as every serious Forex trader would feel this way. However, it is unwise to act on this feeling.

In the case of experiencing such loss, your best action is to exercise discipline. Remind yourself that you cannot force trades, you have to let the opportunity come to you. Take a break from trading (if you must), restrategize, and come back stronger.

3. Consider Increasing Your Stop Loss Margin

As we have seen in the previous section, a stop loss that is too close to the entry price of your chosen currency pair can take you out of a trade even before that trade begins to become successful. This is due to the high volatility of the forex market.

So, to combat this problem, you should set your stop loss at a position where you know that once the price reaches, your setup has been invalidated. You should also consider risk management while doing that. You can learn more about choosing the best stop-loss order.

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4. Have a Good Trading Plan

There is not much to talk about here. You should have proper guides and signposts for making objective, and not subjective (or emotional) decisions when actively trading the currency market.

5. Stick to Your Trading Plan

A way to minimize losing streaks is by keeping focus, following “a clearly defined set of rules for entry trade, exit trade, time frames, and order types”– (corporatefinanceinstitute.com)

Successful trades will come, so be patient and stick to your trading plan, as a certain percentage of losses in Forex are hardly avoidable.

6. Review your Trading Strategy

Reviewing your trading strategy can help you break out of losing streaks in forex.

As explained earlier, you can do this by backtesting to determine the accuracy of your trading strategy. If the accuracy and risk-reward ratio do not combine to form a successful trading strategy, then the strategy is faulty or inefficient.

For example, a strategy with a win probability or accuracy of 30% can still be successful if each trade has a risk-reward ratio of 1:4 and above.

How to Avoid Losing Streaks?

Time Needed : 365 days 00 hours 00 minutes

Well, we are going to be blunt with you. It is not entirely possible to completely avoid losing streaks. But here are some steps you can take to minimize your chances of experiencing it.

  1. <strong>Studying Previous Trades</strong>

    The constant study of previous trades both the successful and unsuccessful ones is important. This is because it helps to recognize pitfalls that should be avoided in the next trade.Also, similar trading opportunities can appear over a prolonged time. And when you don’t study your previous trading activities, you could end up making the same invisible mistakes over and over again.

  2. Watch out for News releases

    Through a proper combination of technical and fundamental analysis, you should be able to avoid the volatility and uncertainties that occur due to news releases.Some of your losses may have occurred due to trading during these events.

  3. Optimize your Trading Strategy

    Optimize Your trading strategyContinuously work on your trading strategy. Identify its weaknesses by backtesting or reviewing old trades. Also, work on yourself as a forex trader. Ensure you do not become a victim of your emotions. Desist from bad trading habits.

  4. <strong>Spend Less Time on Live Charts</strong>

    Avoid Losing StreaksSpending lots of time will cause you to see many opportunities that are not included in your trading plan. It can also cause you to close successful trades early.Swing traders should not spend more time than necessary on live charts. This will help them reduce the temptation of taking unnecessary actions that could lead to losses.

Tools
  • A mobile device or PC
Materials
  • forex-technics

Frequently Asked Questions About Losing Streaks in Forex

What causes Losing Streaks?

Losing streaks can occur as a result of a trader’s negative reaction to a previous loss. How you react to the outcome of a previous trade can affect the preceding one. For instance, being impatient and giving up on your trading plan can cause a losing streak.

How Do I Identify Losing Streaks Early?

You are on a losing streak the moment you lose more than once in a row. The more losses you incur in a row, the greater the emotional effect of the losing streak.

How Do I Prevent Losses in Forex Trading?

Preventing losses in Forex trading is practically impossible because they are bound to occur. However, the probability of making losses can be reduced by simply trading with an excellent strategy and not emotions.

A Concluding Note

Losing Streaks in Forex does not always show the experience level of a trader since it is something that is faced by every Forex trader.

Whether novice or expert, full-time or part-time, successful or unsuccessful, losing streaks must occur from time to time.

Having understood that it is a path in the trading process, you should also understand that learning how to react rightly to a losing streak is more important than learning how to avoid it completely.

Those methods of breaking out of a losing streak as explained here, are both products of painstaking research and mixed opinions of our Forex trading team.

References

earnforex.com – Methods of measuring losing streaks by earnforex.com

backtesting – The right way to backtest a forex strategy by tradingheroes.com

babypips.com – Why and how you should avoid overtrading according to babypips.com

currency pairs – How trading multiple currency pairs doubles your risks by babypips.com

Brett Steenbarger – His definition of Revenge trading on axi.com

opening or closing – What do open and closed positions mean by litefinance.org

volatility – Understanding forex volatility by xtb.com

avatrade.com – A quote about the trading plan from avatrade.com

stop-loss – How to set stop losses according to babypips.com

pips – How to calculate pip value by investopedia.com

trading journal – Trading journal: what it is, and how to create one by dailyfx.com

risk management system – Top risk management strategies in forex trading by ig.com

technically and fundamental analysis – How to Combine Fundamental and Technical Analysis according to dailyfx.com

Here – How Should I Determine the Price Level for a Stop-Loss? Investopedia.com

objective, and not subjective – The definition of objective and subjective trading by corporatefinanceinstitute.com

corporatefinanceinstitute.com – A quote from corporatefinanceinstitute.com