I thought I would share with everyone a question I received the other day. It's a common question that myself and all the other coaches get with regularity.

How many losses would you take before stopping?

It’s a good and valid question. It is certainly understandable why anyone would want and need to know the answer. In fact, it is a question everyone should ask. The issue is not in the asking however. The real issue is in the answering.

The tendency is to come up with an answer that has some sort of ‘feel good’ or perhaps more accurately, ‘stop the pain’ type of remedy. And in fact, I would venture to say that most traders will come up with a response that is motivated by an “instinct to survive” necessity. The problem is that this type of response, which is a perfectly natural thing to do, is very wrong! It is a response that puts your personal needs before the needs of your trading.

Trading and markets are not human. But you are. The intuitive thing to do is to stop the bleeding, so that you can survive. But success in trading typically requires the counter intuitive action. The only way to really come up with the right response is to be able to go back and analyze a lot of trades that would have been generated by your method. The responsible trader, or should I say, the professional, serious trader who truly has the will and desire to succeed and make money at this endeavor, should do a good amount of ’foundation building.’

There is a way to come up with the right answer to that question. But in this trader’s honest opinion, it can only be derived from extended backtesting and a deeper knowledge of the win/loss column. If you take the time to do that, you will learn a great lesson that pertains to the ongoing relationship between wins, losses and how the combination of the two, create your equity curve.

Without that knowledge, you’re just trying to swing a bat at fast pitches in the dark, with your eyes closed. 5 losses in a row? That doesn’t happen very often with a good online trading system, but it does happen. 6 in a row is possible. I’ve written a lot about this in the past. Back in 2009, when we were trading the Russell eMini in the live trade room with a system that was posting a solid 62% winning percentage, we experienced a very interesting thing. Van Tharp taught us that even a system with a high winning percentage like that has a 1% chance of catching a 9 to 13 trade losing streak. Can you be afraid of that? Amazingly, at the 650th trade, we did embark upon an 11 trade losing streak. There was no way to know at the time we were in the midst of that, trade after trade. What do you think happened next?

First of all, a lot of people quit. All the loose fruit were shaken from the tree. Who could blame them, really? They’re just human beings responding in a natural, intuitive way. The instinct for survival is very powerful, obviously, and they were attending to ‘their’ needs. The need to stop the pain so that they could continue being. But what happened next was so predictable. No, the system did NOT break down. A 62% winning percentage over 650 trades didn’t happen by accident. On the 12th trade, the losing streak was broken. Moreover, it proceeded to embark upon a 16 trade winning streak and get this.. Brand New Equity Highs!! The system ended up posting a NET 400% annual return! Yet so many just bailed out, tossing the baby out with the bath water because they didn’t have the overall vision. The needs of their trading were pushed aside to accommodate their own personal needs. Think about it.

That is a real life example to emphasize my above points. You have to become involved with the win/loss column as it relates to the equity curve. It’s a trees from the forest type of thing. Don’t get lost in the trees and lose the broader perspective vision of the growing forest. Those that go through the trouble to create a strong foundation before committing real money, will be in a much stronger position to succeed as a trader. Studying the win/loss column will provide the best and most intelligent answer to the question, how many losses. Anything else is most likely a very human, and very wrong answer.

For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.