FIRSTLY, relax. Breathe. Take a few slow, deep breaths. Isn’t that better?
Let’s think this through together.
Your account can only be in SIGNIFICANT drawdown for a few reasons:
1. You didn’t stick to your trading plan. Go stand in the corner for an hour and write one hundred times “I will stick to my trading plan.”
2. You stuck to your trading plan and still lost money. Ask yourself, “What is the normal drawdown expected in my trading plan?” and “What is the most adverse drawdown expected in my trading plan?”
If you can’t answer those two questions, go back and backtest it, please. You may discover that the drawdown is well within your trading plan parameters. In that scenario, you can reduce the exposure per trade if the drawdown is too large. Or, you can live with it and trade on with the acceptance that this is normal.
OR You may discover your trading plan blows up regularly, and your original backtesting did not cover all market scenarios. Nothing you can do here. Shut the system down and go back to the drawing board.
IF you discover that this drawdown is unexpected, and your trading system’s probability has gone down the drain, go here to understand what’s happening.
3. “What trading plan?” Okay, take a few more deep breaths. Now back away from the trading terminal very very slowly. That’s a formula for disaster. Go back to square one and design a plan.
Although this list probably isn’t all-inclusive, it should cover most of the common scenarios. Note that usually, in a drawdown, people will stop adhering to their trading plans. That’s where things can get really ugly, really fast. Just don’t do it.
With best wishes for your trading,
Private Fund Trader/Head Trader Consultant
“We take your trading seriously. You should too. Make It Pay.”
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