Should you Reduce your Position Size when on a Losing Streak?

When losses start to add up in trading, we are often pushed to deliberate on which parameters to establish or modify to prevent further drawdown and protect our capital.

Here, reducing our position size may appear as one of the effective steps to take, to move into safety.

Let’s look at the benefits and drawbacks of adjusting trade quantity when on a losing streak:

Benefits:

1. It limits further drawdown potential: Lessening your stake on each trade can mitigate damage on your capital. It allows you to protect your funds and remain in the game.

2. Gives emotional relief: It can minimize the emotional burden and stress that comes with a losing streak. It can calm you down and make you feel momentarily safe.

3. Can discourage revenge trading: After a series of losses, fear and despair usually kicks in. We may begin to chase and attack the market, become illogical in an attempt to recover our losses.

Here, decreasing your stake may partly prevent you from losing control.

Downside:

1. It minimizes recovery: Smaller positions mean smaller profits or gains. It slows down recovery when things go well.

2. Could be a sign of low confidence: If you often find yourself adjusting your risk, it could mean that you do not have a strong faith or trust in your strategy.

3. It can signify weak strategy: Repeatedly modifying your position size can imply that there’s a problem with your trading plan or analysis — A wake up call for system re-evaluation and error identification. 

In summary, occasionally reducing trade allocation (maybe due to volatility) is a good risk management move, but it becomes a red flag when you find yourself frequently doing it; when it becomes a habit.

In order to not fall into this bad habit, take a break. (Re)build, test and optimise your plan before implementing it in a live market. This would help you engage only the “right” setups.