Surviving a Drawdown: 7 Steps

 

 

 

 

 

 

A draw down is a normal occurrence for a trader. Swing traders experience them in trending markets, trend traders experience them in choppy markets, day traders experience them in markets that whip saw violently, and growth investors experience them in bear markets and corrections. the key to surviving them is staying disciplined in your entries and exits. Only take valid  entries and always cut your losses at predetermined spots where you are proven wrong. If you are gunning for high returns then you can expect draw downs that are about half your return rate. A draw down is a function of the market not being conducive to the traders method and system, it is not an indictment of the traders ability if they are disciplined in taking their entries and exits. The question is: “Where will your account be with a string of 7 losses?”

Here are 7 steps to limit the pain of draw downs:

  1. When losing in trade after trade, lower your trading size by 50%. Trade smaller until a winning streak begins.

  2. Only risk 1% of your capital per trade. While this is standard, you must avoid the temptation to trade big to make up your losses. This usually compounds the problem becasue the market is not co-operative with your style during a down trend.

  3. Stay diciplined with your entries and exits. Do not get sloppy.

  4. Do not abandon your method, you have to stay the course so when your method comes back in favor you will start winning again.

  5. Do not take losses personally. It is not your fault that the market is not conducive to profits if you are trading your proven system.

  6. Do not fall into the temptation to let losers run. Cut your losses at predetermined stops regardless of the pain.

  7. Do not stop watching the market, be ready to take the right entry when it presents itself. Many traders get so beat up on a string of losses that they stop focusing on their watch list and stop taking high probability entries. Don’t ever stop.