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How to Handle Draw Down

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How to Handle Draw Down

Despite what you may read on social media or trading forums it is absolutely certain that you will suffer draw down periods throughout your trading career. There will be times where the market is simply not conducive to your strategy, there may even be times where your own performance is not quite up to scratch and your results will suffer in line with this.

In fact, unless you are making a new account high then you are technically in draw down. The question is how deep will the draw down be and how long will it last?

A draw down period that lasts any reasonable length of time will undoubtedly have an affect on you. It would be perfectly normal to lose your confidence, second guess your next trade or potentially mismanage a trade you are already in through fear of taking another loser.

As traders we cannot allow ourselves to be overruled by these emotions, certainly not if we wish to have longevity in our careers. But how do we learn to deal with extended losing periods and how do we help ourselves back to a new account high?

  1. Understand and accept what is normal and realistic

The words in this title are crucial! Understand, accept, normal and realistic. It’s very easy for people to have a distorted perception of what perfectly acceptable trading results look like. Of course we all want to win but you must accept that you will have losing trades and that sometimes this can turn into a period of losing trades, this is normal,  despite what you may read on social media!

  1. Get good at losing

We have found from working with numerous traders that there is generally a lack of understanding when it comes to probability, or in some cases people do understand they just don’t acknowledge the realty of it in their own trading.
For example, on a 50% strike rate (which is a perfectly good strike rate if you have a positive risk reward ratio) it is statistically guaranteed that you will at some point have at least 6 losing trades in a row. If you are trading a longer term strategy and on average only take one trade a week, your losing period could last for a number of weeks or even months. Once you come to terms with this reality you can start to become more comfortable with the idea of losing periods.

  1. Moving out of draw down

This is where you need the mental strength and discipline that is so often spoken about within the trading industry. Discipline is trait that is certainly required but it’s not always clear what it really means. For us it’s about sticking to your strategy rules and following your process to the letter, through good times and bad. This is absolutely essential when you’re experiencing a series of losing trades as the temptation to deviate from what you know works will be at its strongest during a draw down period, some people abandon their strategy altogether! Clearly this is worst thing you can do.
Now more that ever you need the determination to succeed and push through this period, if you can maintain your focus then you will eventually emerge from the gloom of draw down a you will be a better more rounded trader for it.