How To Deal With A Drawdown In Trading

General Trading August 7, 2016
The dreaded drawdown is something every trader must deal with. It can be a very helpless feeling especially when you don’t know why you’re continuing to lose or how you’re going to work your way out of it. Some feelings you may be having are nerves to pull the trigger again, bet bigger on the upcoming trades, or pressure to win it all back on one trade. All of these are very natural feelings and are more common the newer you are to trading. As you progress through your trading career, you will continue to have these impulses and feelings whether you want to admit or not. Veterans will have been through these times before and hopefully have a iron clad trading plan that’s been through a drawdown or been tested and proven to pull you out of one. Here are a few ways to deal with a drawdown.

Step back from trading, re evaluate and change strategy?

You should always be evaluating your strategy. Markets are complex beasts that require critical thinking at every moment. The moment you think you have it figured out, you’re going to get burned. Taking a step back might be a good thing for you as well. It never hurts to step back and go over what you’ve been doing. This can be one of the best learning experiences you will ever have. It is true when people say that you don’t learn anything from success but learn everything from your failure. Every trader has been in the position you are in now. We have all been in massive drawdowns without the answers on how to dig our way out. When it comes to changing your strategy that is completely dependent on the trader. A question to you would be, have you back tested it enough to know the expectancy and your maximum drawdown? Are you trading your strategy any different than you did while testing it? If you can answers these questions then it’s time to go back to the testing phase. Trading an untested strategy is the easiest way to lose money. trading300

I feel like I will miss out if I don’t continue to trade.

This is probably the most common feeling that leads people to over trade. That feeling that you will miss out on the home run. Unfortunately, over trading always leads to over leveraging, bigger losses, and less control. The best thing about trading markets is you can quit for a day, week, month, or year and when you get back to trading there will be plenty of opportunities waiting for you. Your strategy should be specific enough that you’re only looking for certain opportunities and not taking every trade that presents itself.

Continue strategy but reduce size?

If you feel the need to reduce size, then you were probably trading with too large of a size in the first place. Large trading sizes are one of the quickest ways to find you bankrupt. Instead, you should be trading small sizes and building your account. A Professional Forex trader never bets 25% on each trade because that’s exactly what they’d be doing, betting. It would only take four consecutive trades to wipe out their account or render it so small that it would be nearly impossible to recover. Remember, small position sizing is your friend. It will keep you around long enough to learn to trade and build an account.

Take a break from trading all together for a while?

Many traders find themselves in this position all the time. Losing a significant portion of your account is like dealing with a death. You are dealing with a significant amount of grief. A short break wouldn’t hurt especially if you’re not thinking clearly. Take this time to work on the mental side of trading. Chances are you have not dealt with the emotional side of trading and have only thought about your trading strategy and how much you plan to make. Instead you should be preparing working on your mental approach just as much as your trading strategy.

Try winning it all back on one or two well timed trades?

This is always what pushes traders to fail. Let me make this perfectly clear, you are not going to win it back on one or two well time trades. It’s just not going to happen. Remove this thinking from your mind altogether. Focus on rebuilding your account the right way. The best advice for any trader is to know that trading is a journey. You can’t just show up and expect to succeed. It takes hours and hours of hard work and involves many failures along the way. It is like playing professional sports. That player didn’t wake up and suddenly become a great athlete. They put in a significant amount of time practicing to develop their game. A good book to prove the point would be Outliers by Malcolm Gladwell. He points out the 10,000-hour rule. Trading is the best job in the world so keep at it and dedicate yourself to becoming the best.