The Best Way to Deal With Drawdowns
Get ahead of those losing streaks
Losing streaks are the worst part of trading. Even experienced traders get caught up in them. They can have a real effect on your emotional state. Even though we know they’re a necessary part of trading, the emotions we feel - anger, regret, frustration - will manifest themselves in our lives.
Let’s get rid of that. A good trader feels happy after making a huge gain, a great trader feels nothing. The mark of a true professional is to execute tasks flawlessly, without any emotional impediment.
The Sweet Spot
When experiencing a losing streak, the first thing you should do is take a step back and stop trading. It doesn’t need to be too long, could be a few hours or days. What you’re doing is giving some time to detach from the immediate pain. In the heat of the moment, we could easily revenge trade or make stupid decisions.
This will not solve the problem but will stop it from getting worse. The first thing you do to get out of a hole is stop digging. Every strategy has drawdown periods. Once you re-engage with the market, you will have a fresh perspective.
The problem comes from being too attached to trading as an income source. It’s not like other income sources, where you get paid upon completion of a task. You still need to complete the tasks, but you might not get paid. You need to constantly be creating your own tasks and executing them flawlessly.
This is very stressful if it’s your main or only source of income, and too much stress hurts performance. If you have other income streams, you’ll notice that it becomes significantly easier to deal with emotions. You’re not too attached to the outcome because you have something to fall back on.
However, you don’t want it to be meaningless either. It should be important enough to deserve your full attention. If you don’t care enough to be consistent with it, you’re wasting your time. If you do half the work, you will not get half the money.
This is the sweet spot we need to hit. It matters enough to put your full effort and time into it, but not enough to affect your life. This will truly bring out the best trading results with the least emotional involvement.
A professional gets the job done with the highest level of efficiency. They know everything about their field of expertise and aren’t affected by any personal defeat or gain. They simply complete tasks and keep doing so until they are done.
A professional's only sensible approach to dealing with drawdowns is to keep moving forward. Being sad will not improve results. Panicking will not get you closer to your goals. The best thing you can do with your time is to relentlessly look for ways to improve.
Success is like a maze. Some find the exit right away, but most of us will keep getting catching dead ends until we get out. Emotions will not get you out of the maze faster. The only thing you can do is keep trying until you eventually find your way out.
Disclaimer: Investing in stocks, bonds, futures, options, and other securities carries significant risks. Some or all capital may be lost. With leveraged instruments, losses may exceed initial capital. Past performance of a security does not guarantee future results. Any content from this newsletter should not be taken as financial or investment advice, but for informational and entertainment purposes only. This newsletter simply shares my personal opinions and notes. Consult with a registered financial/investment professional. This newsletter and its authors are not licensed financial/investment professionals. By reading and using this newsletter, as well as any other publications, you are agreeing to these terms.