A "trading rut" is invariably endured by almost all traders at some point in their trading experience. A trading rut is a point in time where profits are elusive, or losses may even be mounting. These losing or unprofitable streaks can happen to anyone at any time. It may occur because the market has shifted in some way. At other times, it may be because the trader has altered a strategy or is no longer adhering to a trading plan. No matter the reason for the slump, there are five questions a trader can ask to help isolate the problem so changes can be initiated and hopefully a return to profitability will ensue.

TUTORIAL: Trading Systems: Introduction

The Questions
The following questions should be answered as honestly and as fully possible. Each will probe current market conditions and will require the trader's own strategies to be scrutinized. Traders should also realize that losing trades occur to everyone, and even the best trading system can experience a string of losses. Trading rules and strategies should not be questioned every time a losing trade occurs; these questions should be used when the trader is in a sustained period of unprofitability. Being aware of these questions should also keep traders on course at all times, helping to avoid "ruts" in the first place. (For additional reading, check out: Day Trading Strategies For Beginners.)

1. Is the investment product I am trading moving in such a way that it is even possible to produce a profit based on my methods?
Markets continually shift from low to high volatility and back, and ranging to trending and back again. Therefore, what works in one set of conditions may not work in another. A plan may be executed perfectly, but if executed in the wrong market environment it will likely be a losing endeavor.

Therefore, traders must consider if their entry points, stop levels, profit targets and money management strategies are viable in the current market conditions. If not, then the trader should avoid trading until conditions are more suitable, or create alternative strategies for the conditions.

2. Am I trading against the trend or with it?
Many traders develop strategies to capitalize on trends. Trends occur on different time frames, and which trends are currently relevant should be noted by the trader. Trading with the trend can be subjective in that a short-term trend is going one way and a longer term trend going the other. Therefore, being aware of multiple trends and deciding which ones to trade is a crucial factor in trading success.

If a trend following strategy is being used but is not profitable, traders must consider if the market is even trending. If a trend is occurring, the entry point is possibly too late (close to a correction point) in the move, or stop levels are too close to the price. If the strategy appears as if it should be profitable (but isn't), are the rules of the strategy being adhered to? It may not be the strategy but rather the trader's lack of discipline which is the problem (which is quite often the case).

3. Do I have a set of rules for entries and exits and am I following these rules?
If a trading rut is occurring, it could be because the trader doesn't have a detailed plan for how to enter and exit positions. Are entry and exit rules written out in detail? The details should include how and when trades will be entered and exited.

Traders must also question if they have made any small changes in how the plan is traded. An example is entering in real-time as a signal occurs, as opposed to waiting for the close of a price bar, or vice versa. Such a change could shift the dynamics of a strategy.

Also, have the entry and exit rules been tested in some fashion? Or are the rules based on unfounded assumptions? Strategies can be tested through backtesting, paper trading or a demo account if the viability of a strategy is questionable.

4. Am I trading all my signals or only certain ones?
When systems are created, especially if it is backtested, there is an assumption that all the signals produced by the strategy will be traded. If certain traders were filtered out of the results, these same trades should be filtered out in actual trading. Therefore, the trader must ask "Am I following my plan or am I making too many, or too few, trades?"

If additional trades are taken, which is not part of the trading plan, the plan should not be blamed. The trader should cease these excess trades until these trades can be incorporated into a profitable system.

If all the signals are not traded, this could skew the profitability of a strategy drastically. Traders should check to see if the trades being skipped are profitable ones. If so, trade the signals.

5. Have I created money management rules and am I following them?
One of the most important aspects of trading is money management. Each trade should only expose the trader to a very small amount of risk, ideally less than 1% of the trader's capital. Therefore, if money management rules are in place, are the rules being followed?

It is possible that rules may be in place, but in actual trading do losses end up larger than originally planned for? Slippage, or fees, can result in a loss being larger than anticipated, and can wreck a profitable strategy if risk is not properly accounted for. If losses are continually slightly (or greatly) larger than anticipated, reduce position size, switch to a broker with lower fees or stop trading a market where there is so much slippage, risk controls cannot be properly implemented.

The Bottom Line
A losing streak can happen to anyone, and likely will, if trading for a long enough time. A rut can be caused by changes in the market or in how a trader implements their rules. By scrutinizing their system, the trader can hopefully isolate the issues causing the string of losses so it can be fixed. Monitoring markets and determining if the system will even work is one way to do this. A trader should also monitor if they are trading with the trend or against it; if they have entry, exit and money management rules in place; if all signals are being traded and most importantly if all the rules in place are being followed. By examining the market and scrutinizing the trading plan (and how it is implemented), it is likely the cause of the "rut" can be found and the appropriate action taken to remedy the situation. (To know more about trading, read: Introduction To Swing Trading.)

Related Articles
  1. Active Trading Fundamentals

    Tips For Controlling Investment Losses

    A profit/loss plan helps investors recognize mistakes and invest logically, rather than emotionally.
  2. Options & Futures

    Losing To Win

    Adopting realistic expectations is essential to staying in the trading game.
  3. Options & Futures

    Getting To Know The "Greeks"

    Understanding price influences on options positions requires learning about delta, theta, vega and gamma.
  4. Trading Systems & Software

    Backtesting: Interpreting The Past

    We offer some tips on this process that can help refine your current trading strategies.
  5. Mutual Funds & ETFs

    Understanding Volatility Measurements

    How do you choose a fund with an optimal risk-reward combination? We teach you about standard deviation, beta and more!
  6. Investing

    In Search of the Rate-Proof Portfolio

    After October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
  7. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  8. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  9. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  10. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  1. Does mutual fund manager tenure matter?

    Mutual fund investors have numerous items to consider when selecting a fund, including investment style, sector focus, operating ... Read Full Answer >>
  2. Why do financial advisors dislike target-date funds?

    Financial advisors dislike target-date funds because these funds tend to charge high fees and have limited histories. It ... Read Full Answer >>
  3. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  4. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  5. When are mutual funds considered a bad investment?

    Mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high ... Read Full Answer >>
  6. What fees do financial advisors charge?

    Financial advisors who operate as fee-only planners charge a percentage, usually 1 to 2%, of a client's net assets. For a ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center