Drawdown is a reality that all traders face on a fairly regular basis. I’m sure that everyone reading this knows what draw-down is, although for redundancy I’ll explain it anyway. Drawdown is when your account, by a series of bad trades or trades that stopped out, shrinks. Your account stays in drawdown until it is back to the level that it was when the drawdown started. Practically, if your account started at 100k and grew to 120k, clearly you’ve been doing great. If your account shrinks back down to 110k, then your account is in drawdown and remains in drawdown until it breaches 120k again.

A simple enough concept really, but the effects of drawdown can be devastating to your mind set. It can strip you of confidence and/ or lead to you making very silly greed or fear-based decisions. There is a way to avoid this though. Not drawdown, that is unavoidable, but the impact it has on your mental state.

The easiest way to deal with drawdown is simply to exit the market completely and take a week or two off. Sure, you’ll miss some opportunities during that time, but you will have had the chance to clear your head and come back with a fresh set of eyes and no recent bias; allowing you to ‘start again’ and fight your way back to the top of your own equity curve.

Another way would be to simply trade smaller. Trade so small that it hardly matters if you get it right or wrong. Once you’ve strung together a couple of winners, you can slowly start increasing your size again, until you are back up to normal size. Again, helping you to fight your way back.

Alternatively you can accept that you can’t always win and just keep trading and sticking to your rules. This is probably the hardest thing to do because it places you under higher amounts of stress than the other two options.

If you can accept, deep within the core of your being, that losing is OK, and that you do not need to know what is going to happen next in order to make money, then you can muster up the courage it takes to unwaveringly stick to your rules and trust your edge and simply keep trading. This certainly is the fastest way, albeit the most difficult, to get out of the red and back on track with growing your account.

All of this of course means that you have to track the performance of your account on a daily or trade-to-trade basis. This is handy because it allows you to plot your equity curve on a graph. Trust me here, seeing that you’re still up from where you started, even if you’re in drawdown, can create a tremendous feeling of comfort that helps keep you in a confident and care free mind set. Just the kind of mind set that you need for trading successfully.

If the market has mistreated you some over the past month or so, chin up! You’ll learn something about yourself you never knew and soon be back on a winning streak.

Trader Petri