• : March 28, 2021
  • : B. Krishnakumar

Whipsaws: A Test of Your Character




The March series derivatives contract has been a nightmare for breakout traders and/or trend followers. There were quite a few whipsaws, resulting in a drawdown. Phases such as these are unavoidable, and it is during this phase that you will get a better understanding of yourself as a trader and about your trading system too.

While back-testing, we do not realise the pain of whipsaws and / or the influence of the fear of missing out. When we execute a system, we realise that money is involved and the pain of losing money on consecutive trades forces us to either tweak the system or may be even abandon it.

The other issue I pointed out above is the errors or mistakes triggered by the overwhelming psychological factor called FoMo or the fear of missing out. This perhaps is the single biggest factor that forces a trader to commit rule breaks. Again, while back-testing, our psychology is neither tested nor impacted.

And, more importantly, we do not realise what a 10 or 12 trade losing streak means. We might have noticed it during back-testing and even aware of it. But, when this plays out in real time, the pain of losing money actually kicks in. This is where your conviction in the system is tested.

Though it is easy to advise, just stick to your system, it takes confidence in the system to do so. Just check your system’s win-rate and the historical backtest results. Compare these with the current losing streak and check if it within the statistical limits. If the answer is yes, then just stick to your system.

If you are unable to execute the next trade, after a string of losers, then it could either mean that you do not have confidence in your system or you are trading a position size which is beyond your risk tolerance.

If you constantly have the urge to tweak your system to avoid or reduce losing trades, then it is either a sign of not having confidence in your system or the system may not be in sync with your trading personality. Try to assess where the issue is and fix it.

Before I wind up, if you are someone who has the confidence in your system and are willing to execute the next trade without hesitation, but generally unhappy with the losing streak or whipsaws, then just talk to fellow traders who have been through a similar phase.

You will probably feel happy when you learn that fellow traders too are losing money and you are not alone. Trust me, this helps! This is how human mind works. When there is a power failure at home, the next thing most of us do is to check with our neighbor. We feel relieved if there is power failure for them too. It is the same logic :v