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businessJan 12, 201817:43pending

How to endure trading losses painlessly

Trader Mindset

About this episode

The duration of your drawdown is "how long" it takes you to get back to the previous high. It's one thing to be down 10%, but how long will it take you to recover?

If your losses are "in model" there's no reason to panic. You can get this information from backtesting your rules in a simulator. If you are trying to read charts, you're out of luck because your activity is based upon guesswork. 

While you're enduring a drawdown, your instincts might lead you to begin trading more frequently. 

Greater frequency of trades doest not equal greater opportunity. Most trades are suboptimal so I think you'll do better in any case by trading less.

Your instincts might also lead you to "investigate" a new trading methodology to "overlay" on your existing rules, such as option selling because it brings in "revenue." You can lose your a** selling options. 

Behave consistently as you would when you're up 20%. All you do is follow your rules. Take it one day at a time. 

Meditate on how you feel when you have to be patient. You might feel anxious, depressed, angry, and frustrated to name a few. I don't believe your can overtrade your way out of a drawdown. 

You may also consider trading a larger position on something that you are "sure of" because "...if it only goes up 10%, I'll be back to even." 

"To every thing there is a season, and a time to every purpose under the heaven" - King James Bible

Your trading rules might be "out of season" with the market. If you're a commodity trader, you know those markets are cyclical - so no surprise there. If you're an equity trader, sectors rotate so your winners will ebb and flow in secular markets. 

You will go much further as a trader if you understand that losing money and drawdowns are not a reflection of your ability to create alpha as a trader. But how you handle losses and drawdowns emotionally and behaviorally will provide you and others insight on your managing larger sums of money. Investors and allocators need to know you can be trusted.  

 

 

 

 

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How to endure trading losses painlessly

Trader Mindset

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