ACCOUNT DRAWDOWN STRATEGIES

To this point we’ve discussed some effective ways of growing your account with the profits you make. There will be times, however, when you have losing trades and even a series of losing trades. How you handle these drawdowns can be the difference between ultimate success or failure.

In fact, many traders have been done in by the emotions that come with losing trades and specifically a series of losing trades. That is why we recommend having a pre-defined plan in place to handle drawdown situations.

Having a pre-defined plan in place takes the pressure off when these situations occur. Granted, you still have to follow the plan, but at least you won’t be a deer in the headlights. You’ll know what your plan calls for you to do.

1)  Pre-Defined Plan For Stepping Away
Traders tend to be a success-driven, competitive group of people. That’s why losing can cause so many challenges. Rather than sticking to plan, many traders will overtrade, force trades, or mis-manage trades in the hopes of “getting it back.”

Sometimes this works. Eventually, however, it’s a recipe for an even bigger drawdown.

That’s why having a pre-defined plan for stepping away can be so powerful. It may seem weak or like “giving up” but in actuality it’s one of the strongest things you can do for your long term success in trading.

Here are some ideas:
(NOTE: These are just ideas...and just a few ideas...you need to customize a plan for YOU.)

A) Have a Daily Loss Limit
This can be in dollar or percentage terms. Many brokers can set this up automatically so that if you reach your pre-determined daily loss limit you’ll be unable to trade the rest of the day. Sometimes taking the rest of the day off and coming back fresh can be all you need to turn things around.

B) Have a Weekly or Monthly Loss Limit
This is the same concept as above except that if you reach your weekly loss limit you take the rest of the week off and if you hit your monthly loss limit you take the rest of the month off.

C) Leave For 30 Minutes If You Lose Two Trades In A Row
This is just an example. Adjust this to the time period and number of consecutive losses you feel works for you. Often, going for a quick walk outside helps calm yourself down and allows you to come back with a fresh mindset.

D) Quit For The Day If You Lose Three Trades In A Row
Three losses in a row is often when traders reach the “red zone” mentally and risk making emotional decisions that turn a bad day into a catastrophic day.

2)  Pre-Defined Plan For Lowering Position Size
Many times when things are going poorly traders have the desire to “double up” or add to their position size to try to get back their losses. Again, this can work, but eventually it usually leads to a bad day becoming a horrible day.

Instead, while counter-intuitive, it’s often best to drop the number of contracts you’re trading. Here are some ideas:

– Be sure to drop down to the proper “level” if you’re using one of the account growth strategies mentioned in the previous section. In other words, if your account goes beneath the threshold needed to trade a certain number of contracts, make sure you have the discipline to trade smaller size.

– Consider trading a half position if you lose two trades in a row. Again, this is counter-intuitive when you think of it in terms of getting your losses back, but that’s the key. It’s best never to think about getting your losses back. It’s best to always be thinking about the current moment and making the best decision possible in this moment. A half position takes some of the monetary pressure off and helps you make solid decisions.

– Consider trading a half position or going to simulation mode if your confidence is low. Every trader has been there…no matter what you do it seems like it’s the wrong decision. When this happens, either step aside for a while or cut your position in half or simply start trading in simulation. This helps rebuild confidence.

Conclusions:
Ultimately you want to get to a point where you’re able to emotionally detach yourself from your results. You want to get to a place where you focus only on making the proper decision at any given moment. That, however, comes with experience.

Using some of the tips mentioned above can help you avert disaster as you build toward that level of experience. So much of trading success is just survival. The good times will take care of themselves. You have to give yourself a chance, however, and that means having a plan to deal with the emotional storms that you will inevitably face.

Please contact us with any questions, comments, or ideas regarding these topics. We’re very curious about any ideas you may have.