Why You Are Losing Money: 3 Possibilities
Binary options trading, like any other type of investing, entails a great deal of risk and uncertainty. When things are going well and you are winning a lot of trades, you may feel confident enough to let that fact sit in the back of your brain for a while. It doesn’t take much though for it to come right back to the forefront. In fact, all it really takes is one bad day. If you suffer a major drawdown in your account, all of that uncertainty and doubt comes hurtling back. You can quickly find yourself feeling very confused and frightened, if not outright lost.
At times like these, you will ask yourself the same question over and over again:
“Why am I losing money?”
You will wonder what you can possibly do about it, and you will likely feel yourself being pulled in a dozen directions at once, desperate to solve the mystery. After all, you do not have a moment to spare, especially if you trade for a living. Your account is what you rely on. Without it, you have nothing.
This is when you need to take a deep breath and do what you can to get your head together. In my experience, even though these situations feel turbulent and complex, there are three distinct possibilities. Your first task is to figure out which of these three possibilities explains your recent string of losses. From there, you can figure out a plan of action for getting back on track.
Here are the three possibilities for what is going on when you are losing money trading:
1. Nothing whatsoever is really going on.
2. You are making a mistake.
3. The market conditions are changing.
Now we can look at each of these and talk about what they mean.
1. Nothing whatsoever is really going on.
This does not mean your losses are “all in your head” of course—you can clearly see them reflected in your account balance. But what it does mean is that your panic and the significance you are attaching to the losses may very well be all just in your mind. Just because you have lost a few trades and you have some drawdown in your account does not necessarily mean that it is significant.
How can drawdown not be significant? Even if you have a system that wins 90% of the time, you are still going to have losses in your account, and even losing streaks. And most systems do not perform at remotely that level. You will have losing days, weeks, and sometimes months or even longer. There are a lot of reasons why you might read into these events sometimes and not other times. Maybe it is your longest losing streak to date, or perhaps you have something else on your mind that is causing you to feel anxious. When you are nervous about one thing, it is easy to overreact to another. You may read disaster where nothing is written.
The problem with reacting to each and every losing streak you have is that you will constantly be making changes to what you do. That means that you will never build expertise, confidence, and a solid record of success with any particular mode of doing things. In fact, you may just cripple yourself as a trader now and over time. In essence, by trying to fix what is not broken, you are breaking it yourself, over and over again.
While it can be difficult to know whether you are in a “nothing is really happening” situation or whether you are in one of the other two possible situations, one good rule of thumb is this: If your losing streak is within the bounds of your expectations based on the tests you have run, just leave it alone and keep trading. Of course, if you know there is a problem, then stop and fix it. That means that your situation is probably the one below.
2. You are making a mistake.
There are a lot of mistakes you could be making while trading that are costing you money. Some of these include:
- Breaking your own system rules or money management rules. It is easy for performance to “drift” over time. You get so used to trading your system that you become careless, thinking you are doing everything right automatically, because you have been doing it for so long. Look closely at your recent trades and see if you can spot a rule you have been breaking. If you do, try correcting the problem and see if results improve.
- Allowing distractions into your trading. Has something changed in your trading environment? Are you allowing conversations with others, noise in your surroundings, or other factors to distract you from what you are doing?
- Letting your emotions get the better of you. Sometimes frustration can take its own toll, which can quickly turn into a self-perpetuating loop. Whether you are feeling angry, scared, overconfident, or even are allowing yourself to be distracted by something unrelated to trading, any of these can cause you to lose money.
- You are skipping steps in your process. When you place a trade, even with a very simple system, there are a number of steps that you have to follow. It is entirely possible to skip small, seemingly minor steps without intending to, and then discover that these small steps actually are quite important and have a large effect on your wins and losses. A checklist can help prevent this.
- You are changing the way you use your own discretion. If you are a discretionary trader, or even a trader with a method which is part discretionary and part mechanical, you may introduce variables unwittingly into your trading without even noticing. Even if you are following all your mechanical steps the same way you always do, you may be changing the way you apply discretion to your decisions. Because it is hard to constrain discretionary choices in a systematic way, this is an area where mistakes are common.
If you know you are doing everything right, and your drawdown is exceeding your expectations based on testing, the explanation is almost always going to be the third possibility.
3. Market conditions are changing.
This possibility catches a lot of traders off guard. Novice traders are not the only ones who are susceptible to missing these changes; even traders who have been around for quite some time can miss them. Nonetheless, this problem is particularly confusing the first time you encounter it, because you have never seen it before.
Changes in market conditions can be somewhat unintuitive to the uninitiated for the simple reason that you are dealing with shifts in the market every day. That is after all what you profit off of as a trader. So how can changes suddenly make you lose money?
The key here is to understand that we are talking about changes that occur at a higher level than the level you trade at—and I am not simply referring to a higher timeframe. Changing market conditions may reflect new trends, shifting volatility, and other factors that can have an unexpected impact on your trade outcomes. Think about it this way: Imagine you are taking a journey across desert terrain. You have learned how to navigate all the boulders and cacti and other obstacles that come into your path. But then one day you cross a threshold into a grassland. While may encounter similar obstacles in the terrain, the terrain itself has shifted, and different rules now apply.
This is one of the most difficult situations, because getting through it is not simply a matter of getting back to doing what you already know how to do correctly. It is not a matter of waiting for things to self-correct either. Instead, you have to adapt your trading method to the new conditions.
The good news here is that this generally is possible. If you know others who use a similar trading method as you, some of them may already be successfully adapting the system. And if you ask around, you may discover that people have used variations on your trading method for decades with subtle adjustments over the time to stay profitable in changing conditions. And returning to our metaphor about hiking across different types of terrains, while a hiker will need new skills to cross different environments, many of the basic skills and actions will be the same in different settings.
It is always going to feel like you are in a tough predicament when something which usually works suddenly stops working. You can feel completely lost and afraid, and for many traders, the experience is a paralyzing one.
But once you figure out which of these 3 possibilities describes your situation, you can take concrete steps to recover. If you believe nothing is truly happening, get your head together and wait for the situation to self-correct. Have faith in the trading method that you have tested and used so successfully. If you believe you are making a mistake, go over your trading journals and read through your plan, system steps, and checklists, and identify it. If you believe market conditions have changed, then it is time to go back to testing and start experimenting with adjustments. Reach out to members of the trading community who use a similar system and ask for help.
The most important thing to keep in mind in these situations is that there is always a step you can take to move forward again. You are never stranded or helpless. Once you calm down and start methodically tackling the problem, you will be able to resolve it and move on. Then you can get back to trading binary options profitably.