Mental Edge : Drawdowns - A Fact of the Trading Life - Psychology and Money Management | futures trading

Go Back

> Futures Trading, News, Charts and Platforms > Psychology and Money Management

Mental Edge : Drawdowns - A Fact of the Trading Life
Started:September 27th, 2010 (06:09 AM) by max-td Views / Replies:1,168 / 1
Last Reply:September 27th, 2010 (06:09 AM) Attachments:0

Welcome to

Welcome, Guest!

This forum was established to help traders (especially futures traders) by openly sharing indicators, strategies, methods, trading journals and discussing the psychology of trading.

We are fundamentally different than most other trading forums:
  • We work extremely hard to keep things positive on our forums.
  • We do not tolerate rude behavior, trolling, or vendor advertising in posts.
  • We firmly believe in openness and encourage sharing. The holy grail is within you, it is not something tangible you can download.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community. It's free and simple, and we will never resell your private information.

-- Big Mike

Thread Tools Search this Thread

Mental Edge : Drawdowns - A Fact of the Trading Life

Old September 27th, 2010, 06:09 AM   #1 (permalink)
Elite Member
Futures Experience: Intermediate
Platform: NinjaTrader
Favorite Futures: FGBL 6E B4
max-td's Avatar
Posts: 1,754 since Jun 2009
Thanks: 2,309 given, 911 received

Mental Edge : Drawdowns - A Fact of the Trading Life

Hi all.
i found a bunch of - like i think - very interessting essays on my old harddisk and thought about sharing this here.

its mostly about trading-topics or minimum very related to trading from psychological point of view.
i will not comment things and its also not my personal opinion in all essays for shure -
but for me its very good stuff to have some discussions or some quite thoughts about it.

if you like it, i will make a an ongoing series out of it, once per week or so. let me know.

have fun

Drawdowns: A Fact of the Trading Life

Trader Insight

I once asked a seasoned trader at the CME whether he took a break after a severe drawdown. He said: "Have I done it? No. Have I felt like it? Yes. The other side of my brain has said to me 'I'm not going to run away from this, put me in the lineup, because at one of these at-bats, I'm going to break this slump.' And if I don't go to the game, then I'm never going to get out of it." Drawdowns are psychologically distressing, especially to novice traders without a proven track record. But even seasoned traders may want to take time off before trading in earnest. A seasoned hedge fund manger said, "I have a personal rule that I don't mess with: If I drawdown more than three percent in a month, I go in the penalty box and I can't trade for the rest of the month...It is written in stone. And let me tell you, when I'm getting like two points or so on a drawdown area, I really start picking the trades. The edit process gets way longer because I hate going to the penalty box...If I drawdown more than 20 percent in the year, I'm out for the year: Penalty box." It's easy to feel beaten down and somewhat afraid to get back up and fight after a major setback, but ultimately, only the traders willing to get back up have the potential to break even and get past the drawdown. That said, it is still not easy.

Feature Column

In college I had a secret fantasy: I wanted to "walk on" as a receiver during the last 20 seconds of the Rose Bowl and catch a winning pass. It can't happen. Even if I had the talent to play college football, the coach of my college team probably wouldn't let an inexperienced player play in the Rose Bowl, or any game for that matter. But it's a great fantasy. When it comes to trading, however, many novice traders after a severe drawdown try to do the equivalent of playing in the Rose Bowl. They try to play like a pro, but they don't have the experience. After a drawdown, it is hard to know what to do emotionally. Many novice traders struggle with trying to find the difference between fantasy and reality when trying to recover.

When a novice trader is in a drawdown, he or she needs to believe that it is possible to come out ahead. But is this a realistic expectation? I must admit, some of the novice traders who read my columns keep an optimistic attitude, manage their risk, make trade after trade, but at the end of the year, feed their accounts. For some traders, surviving a year breaking even or with minor losses is actually pretty good. You wouldn't expect to be able to catch the winning pass in the Rose Bowl unless you've prepared for it, so why expect to profit when first starting to trade? You will go through winning streaks and losing streaks. Unfortunately, that's a fact of trading. In the end, you must not let it faze you. It is essential to anticipate drawdowns and survive the learning curve. That said, it is vital to manage risk. A lot can go wrong. A trading system will fail at times. Market conditions will change. Adverse events may ruin your trading plans. The cautious trader survives.

It's easy to say that you should believe in yourself, your system, or your trading method, but what if you don't have an established track record? Even a seasoned trader may not have unwavering confidence in a method. As Mike, a seasoned hedge fund manger, put it, "A trading model is to be used. Never believed. The idea that one model fits all markets, in all times, and in all circumstances is ridiculous. I trade differently today than I did in 1970, 1980, or 1990. I used different models."

It's important to be skeptical. That doesn't mean that you should question your method, but realize that market conditions change and you should be prepared. You may have to change your method to keep with changes in the markets. In addition you should manage risk. As Mike put it, "This is what ninety-percent of trading is about, and I think all good traders will agree with me: It's managing the money...You've got to balance the commitment size of your capital. What percentage do you commit? For instance, in the beginning of the year, I'll risk maybe two and a half, three percent. I may have 80 positions on, but I'll only risk two and a half to three percent. I also like to have a reserve amount, because having traded for 28 years or so, I have war stories. Chernobyl. I was short beans. Got whacked. Asian crisis. I was long S&Ps. So I have a reserve...Instead of trying to always be the infallible human being, count on yourself being fallible. In fact, promise yourself you're going to be a fallible human being. So, if you're counting on yourself being fallible, what kind of profit-to-loss ratio do you need to still make money? I began to require that I must see a risk-to-reward ratio of two and half to one, or three-to-one. So now, if I'm wrong for a dollar, after six times I've lost six bucks. But if I'm right four times, I've made ten. Net, I walk away with four."

For seasoned traders with a winning track record, it's easy to stay optimistic and think in probabilities, but if you are new to this business, it is wise to stay cautious. You cannot crack under the pressure, but you should anticipate drawdowns. Make sure you have enough money saved for a major setback. In addition, trade with money you can afford to lose. Even the best systems or seasoned discretionary traders have drawdowns. Don't get caught off guard. Be prepared by managing risk. If you manage risk, you will be able to survive the learning curve and learn to trade like a seasoned, winning trader.


Reply With Quote
The following 3 users say Thank You to max-td for this post:

Old September 27th, 2010, 06:09 AM   #2 (permalink)
Quick Summary
Quick Summary Post

Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.


Reply > Futures Trading, News, Charts and Platforms > Psychology and Money Management > Mental Edge : Drawdowns - A Fact of the Trading Life

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Upcoming Webinars and Events (4:30PM ET unless noted)

NinjaTrader 8: Programming Profitable Trading Edges w/Scott Hodson

Elite only

Anthony Drager: Executing on Intermarket Correlations & Order Flow, Part 2

Elite only

Adam Grimes: Five critically important keys to professional trading

Elite only

Machine Learning Concepts w/FIO member NJAMC

Elite only

MarketDelta Cloud Platform: Announcing new mobile features

Dec 1

NinjaTrader 8: Features and Enhancements

Dec 6

Similar Threads
Thread Thread Starter Forum Replies Last Post
Trading and It's Life Implications mattz Off-Topic 2 January 16th, 2015 09:42 PM
Applied Life Experience to Trading aligator Psychology and Money Management 2 February 11th, 2011 09:19 PM
Drawdowns, when has a strategy lost its 'edge' fluxsmith Psychology and Money Management 6 October 16th, 2010 06:24 PM
Trading with an edge - what does it mean to you ? trendisyourfriend Psychology and Money Management 22 September 14th, 2010 06:39 AM
Trading PA Practice - trading the right edge benbrooke Beginners and Introductions 57 April 2nd, 2010 03:00 AM

All times are GMT -4. The time now is 09:18 PM.

Copyright © 2016 by All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts

Page generated 2016-10-26 in 0.08 seconds with 19 queries on phoenix via your IP