Handling a Drawdown Period

Before you start trading you should think about a trading method and your money management. It does not really matter which method you choose in the end but you have to be convinced by that method. Back testing of your method can be helpful but is of course no guarantee for future profits.

After a successful start and a few profitable weeks you might recognize that your method is not as successful as previously anticipated. The profit streak is gone and your method is generating one loss after the other.

Now it comes to some psychological aspects. You will pose yourself the following questions:

1. Should I continue like this?
2. Should I change something?
3. Should I reduce my position size?
4. Should I interrupt trading?

As an experienced trader I can recommend you that you should stick to your method. This is usually the best option. Do not forget – you tested your method and there was a time you were really convinced of this method. The moment you change something it will usually take a turn for the worse. Reality shows that if you change parameters of your strategy because of a drawdown period you will usually permanently destroy that method.

You will find out that drawdowns are part of the game, even the most successful traders experience drawdown periods in their careers. This is normal and applies for every trader. You are certainly not an exception. So – sticking to your (tested) method or taking a trading break are usually the two best option in case of a drawdown. Changing parameters of your method is usually not a good option.

 

Agreed. You can't be a successful trader without having losses so accept them and carry on. The point about money management is particularly relevant for new traders who spend far too much time trying to find a magic bullet indicator rather than looking at what they can afford to trade.

 

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