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The Trading Psychology of Reversing a Bad Streak

There will be times when a PM or trader is having a bad period. Whether due to a crisis like the 2007 mortgage one, or due to personal reasons, this bad streak will affect that person’s behavior unless they close the chapter and move on.

How Negative Emotions Affect Trading Patterns

Trading emotions are usually classified into active or reactive. While active emotions – mostly positive – will cause you to feel more confident, impulsive, and to take action without throughly vetting information, reactive emotions – mostly negative – will do the opposite, making you constantly re-evaluate and double-guess yourself and preventing you from taking action.

When you are having a bad streak, you might be suffering from anxiety, guilt or sadness, which are reactive and will cause you to take less action and analyze everything much more thoroughly. It can, on the other hand, cause anger or disgust, which are active emotions and will have the opposite effect, making you tend to move quickly and impulsively without properly vetting the information.

Protect Against Current Emotions

Based on the previously discussed, you will usually suffer one of two major groups of emotions:

  • Anxiety/Fear/Paralysis by Analysis. These will make you not take action. You will take the attitude of someone who loses a game and quits it permanently with fear of being hurt again. In this case, make the effort to take initiative if a new idea has a particularly solid investment thesis and can be executed. You will have a tendency to double-check, verify and second-guess everything you do. Take the best vetted trades and run with them as you would;
  • Anger/Revenge. These emotions are dangerous because of the opposite reason. They will give you a false sense of certainty, a sense that if you act right now you will be able to control more than you actually can. If you are angry or vengeful, make an extra effort to double-check your research, risk/reward targets, and reinforce your discipline and systems;

Closing the Chapter

When you’re going through a bad streak, you will have a constant feeling of being “affected”. Like something is pressuring you, stressing you out, preventing you from performing at your best. This is not the same mental state of clarity that you are in when you create the best trades.

For many traders and PMs, one of the exercises that works the best is a “mourning” process, where you look the brutal facts in the eyes, recognize what you’ve lost, make peace with it, and because of that, you now feel free to make your next move without the mental baggage. It’s not unlike the process of losing a close person or even a job or prized possession. You will have a period where you will be “mourning”, feeling hurt, possibly insecure, still trying to come to terms with the new reality. Just like that mourning process, the more you can accept the end of this phase and move on, the faster you can go back to your original mental flexibility, operating as “normal”.

The Closure Ritual

What I find most useful for trader clients to do is to write down, for example, on a piece of paper, all that they have lost and making peace with it. If possible, gratefulness even works better. Recognizing and appreciating what you have so far, and giving it the value and respect it deserves. Then, closing the chapter and permanently taking it off your mind, ready for the next challenge.

Ideally, this will happen once. But there might be cases where it requires more than one go. I coached a PM that made 12% average on his currency portfolio of $100M for the past two quarters. He had two down months and just couldn’t pick up his feet. He did the closure exercise to come to terms with what happened and get back up on his feet only a few days. It seemed to work in the moment and he was back on top of his game. But in a couple of days, old memories, stimuli came back and he went back down again.

Just like with a mourning process, you might close the chapter and gain closure, but there might be one or two details that still come up periodically that will affect you. Don’t let that compromise your transition. Decide you’ve gained closure, weather the small periodic memories that might pop up here and there, but soldier on.

Game Face On

Now, gaining closure removes you from the negative zone and brings you back down to neutral. But you probably weren’t at neutral level when trading well. You are at the peak, or at least with some momentum. Which is why after gaining closure and closing the bad streak in your mind, it’s imperative that you look inwards at your references of power, your most powerful moments, your habitual rituals, and put yourself in a prepared mindset. You can never place yourself in a winning mindset for sure, but you can get your game face on, and that’s the most you can ask of yourself.

Just like athletes at the start of the finals against their rival, you have to accept that there will be failure, there will problems, there will be times when you fall flat on your face, but if you have a strategy and calculated risk, you will face all of those but still come out on top. Anticipate all adversity that might come and welcome it, as it’s how you will come out on top.


When you’re going through a bad streak, either due to your own issues or due to exogenous factors, the first step to do is to gain closure by facing the brutal facts. This allows you take away the feeling of being “hurt”, vulnerable. In the meantime, handle your reactive or active emotions to prevent you from either not taking action or taking impulsive action.

Once you’ve gained closured and regained normality, making peace with the new normal, now it’s time to tap into your references of power and accept whatever may come with an optimistic perspective and a specific game plan, just like when you do when you perform at your best.

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