Losing streaks when trading penny stocks

Every trader at some point in his career will have to face one or several "losing streaks". This is a fact of this business, and whoever tells you this isn't so hasn't traded enough or is a big liar. Losing streaks can be produced by a faulty use of a tactic, inefficient analysis of market direction and internals, or other situations. These consecutive losing events can not only produce a drastic drawdown in your account, but even worse, can cause considerable psychological damage that might take forever to correct. Let's talk about some of these issues and some ways to correct them.

The first problem with a losing streak is the fact that it "tends to produce mounting losses" (Not funny). After the trader has finished his paper trading period (Interestingly, losing streaks rarely happen at this stage), the trader will have to deal at some point in his development with the diminishing capital caused by streak of losses. Depending on whether the trader has established a proper trading plan to deal with his development, this streak will be more or less bearable. Consistency in the application of a plan and a set of tactics takes time, so it's more likely that a trader will have to contend with losing streaks during his development when he is trying to grasp and refine his approach. Thus, a proper money management scheme that looks to protect capital during the developmental stages is paramount. As the trader gains consistency, his plan will protect him from extremely bruising losing streaks, by establishing maximum losses per day or month, and by regulating the steps a trader should take in case he is facing one of these streaks.

Even more troublesome to the trader might be the psychological consequences of a bad losing streak. When you face a losing streak, and you lack a proper plan, you might have to deal with 'trader's paralysis". This occurs when you had a severe loss, which produces such a fearful state that makes it impossible in your mind to take a new position. Confidence is lost. To climb back in the saddle, the trader has to create a process to recuperate such confidence step by step. It should begin with a brief paper trading period. Then, when the trader begins to trade real money, it's a very common mistake to try to enter into positions with very small stops (Read one of my past commentaries on "The Fallacy of Small Stops") believing those will keep him from further draw downs. This might be a huge mistake. I believe that in order to regain confidence, the trader should enter into positions with wide enough stops so that the probability of it getting hit short term is very small. He might even consider entering into positions with not so great risk/rewards, just so he'll be able to remain in the position for as long as it takes until it hits the target or stop. This might allow him to regain his confidence that he can hold a position. Of course, this is only to regain confidence, and afterwards the proper selection of risk-reward plays is still paramount to a trader's success.

Have a great trading day!Mouser57 of StockHideout.com Penny Stocks, Stock Picks and Stock Message Board