Rising Up From the Dead! (Overcoming periods of Drawdown)
My 6 tips to rising from the dead! (Drawdowns)
2018 was my worst year of financial performance I have ever had. I think many Traders could possibly add the same comment if they think of the year two zero one eight.
To shed some light on the overall macro uncertainty at the time; We had trade wars beginning between USA and China, Rocket Man in North Korea popping off fireworks, President Trumps possible Impeachment, the whole Brexit shmozzle, and just generally, Trump and his twitter account.
2018 was a little slow for me and quite a grind, In the later part of the 2018 I wore a decent drawdown, the worst I had ever had.
For those of you who are unfamiliar with the term "drawdown" google has described it as thus: 'Drawdown is the reduction of one's capital after a series of losing trades. This is normally calculated by getting the difference between a relative peak in capital minus a relative trough. Traders normally note this down as a percentage of their trading account'.
Although, my P&L took a dive, for me and my trading, it wasn't just the money. I took a hit to my consistency, losing day in day out. Getting chopped up every day also meant my trading confidence took a massive hit. I had a good five month period of flat to negative returns, and a cloud over my head. It was by far my worst trading performance of my career and I was in a pretty dark place that would take me a few months to climb out of.
I would however like to note that 2018 was my worst year for "financial performance", 2018 was definitely NOT the worst year for my continued 'trading development'. Regardless of the lack of financial returns for the period, I came to realise later on, that I had actually forfeited 'financial returns' for 'market experience'. That thing called "market experience" my good friends is priceless, especially if trading is to be your chosen long term career. It may not feel like it at the time, but those drawdown periods that can mark the beginning of the end of many peoples trading career, are the same drawdown periods that solidify the career of others.
Most people on social media don't talk about these times. They will just usually stop posting or do some time away from the screens. And rightfully so, something has to change and some self reflection needs to be done. These are very dark times for every trader. and EVERY trader goes through them. Which is why every trader need to learn to deal with them, and deal with them head on you must!
I believe in mindset a lot, perspective too. Situations can look and feel totally different when observed from another point of view. I like to look at these periods of drawdown as an unfortunate necessity for your trading career's development. They hold the key to your longevity in the markets. As hard as they are and as deep as they hurt, they hold the most valuable of lessons. A lesson that once learned, instills a certain self belief over self confidence, two very different things.
So, if you are currently in a bit of a pit of despair, don't stress. Cyclops Trader has been there, and yep, its true, there is a path out. You just need to find it. Drawdowns are an opportunity to work on your damage control protocol. Its easy to be a winner in trading when you are trading well, and markets are playing into your strengths. But when it gets hard, that's when a trader begins to becomes "seasoned". Being resurrected out of the ashes time and time again.
So here are just six things you can do IMMEDIATELY to help stop the bleeding of cash, and take a measured and confident approach to bouncing back.
Stop what you are doing. Take at least one day off (recommend a full week) and relax. Don't look at the markets. Disembark the sinking ship. and get on a life raft!
After your micro break. Its time to reflect. Go through your trades from when you started to really lose your profitability, and work back to the present. Ask yourself, Is it a couple of big losses or many small paper cuts? Have a look and analyse where you are losing the most money, and more importantly where you are making money. But make sure you can Identify exactly what trades aren't working and why you think this is the case. For example, In my reflection phase back in February, I identified that in the most illiquid session of the day I was getting smashed stocks breaking out. I could see that the lack of liquidity and momentum was a real issue. The overall market was choppy, thin and very skittish.
Immediately make the necessary changes in your daily trading based off the "reflection" phase for an immediate change in your trading pattern. For example. I didn't trade stocks making new highs at all. Didnt touch them full stop. I just ignored them. Pretty simple really isn't it! Instead, I was going to size down and work mindfully on keeping a good record of my trades taken, and collect some good trade data.
Acknowledge that this is not a time to be making money but a time to be evaluating and working things out. A time to make money would come but accept that this time is not now. I set very small sizing limits for myself in this period. I print it out and stick it to my screen. I use these sizing limits to trade with and keep detailed statistics on where I an winning and losing. Trading smaller allows me to take the trades as usual in a relaxed state. this all helps for data collection purposes. I stayed disciplined and kept to this for a couple of weeks.
- Define your Path.
After you have analysed your collected data, and you can identify what is working and what isn't. Now define how you are going to move forward. Implement some new rules or boundaries for the current trading environment. Define a basic goal and mindfully think about it each and every day. Mine consisted of taking small good trades, and finish end of the day in the green. I didn't care by how much as long as the day was a win!
Do this every day (it could be anywhere from a couple weeks to a couple months) and slowly your confidence return. Your mindset will be more peaceful and fluid. You will think more clearly and Identify better trades. The fog will be lifting and as that consistency creeps back in, inevitably and naturally your size will increase too and along with it all, so will your account.
Hopefully this helps any of you going through the inevitable tough periods that you will face over and over throughout your trading career. So when you are experiencing the depressing depths of a drawdown. Don't just give up, roll over and turn to alcoholism or crack cocaine. Just sit down, breath deeply in and out, and at the very least, try my steps above. Add to them, use them as a guide to develop your own. What ever you do, take some solid steps to improving and becoming a "seasoned" trader. After all, experience only comes from the actual experience right!
Happy drawdowns traders :)
(P.S. If you do happen to try this and it works for you. Leave me a comment I would love to hear from you! It really would make my day)
Excellent advice to novice and well seasoned traders clearly a lot of thought and emotional capital went into this.
Hi Cyclops, agree about 2018 being ordinary, 2017 was brilliant forcing me to avoid putting in tax return until now so i could offset losses from 2018 due to potential tax bill.
You’re right about drawdowns requiring you to go back and review your system, I certainly did, re-jigged a few things and this year has improved dramatically.
Trading as in life is constantly evolving and if you don’t swim with the current you WILL drown.
An excellent and well detailed blog. I went through similar situations last year, over trading and not evaluating what I was doing. A few times I was ready to give up and then stepped back and thought about what I was doing right and wrong. I have developed more patience and a calmness with my trading. I have been more successful in the past 6 months with small wins but wins all the same.
Thanks for the advice and content that you give to the trading community.