Source: Pat Mullaly
Avoiding drawdowns is impossible. However, the negative effects both financially and psychologically can be mitigated. How?
- Visualize. Have a vision of what you’re trying to accomplish over the next one-to-five years. Then define a plan for what you need your trading account to do on a weekly and monthly basis to make that happen. Having a long-term goal, and then managing positions in alignment with those goals, will keep you less myopic and more focused on the prize.
- Size your positions smartly. Too much size and a sudden, adverse event, can be devastating. Too little size, and a favorable market barely moves the needle. Figure out the position size and risk that works for your profit/loss, and stick with that.
- Get out. There’s no shame in shedding your losers. Don’t let ego, hopes, or fears paralyze you. As the old saying goes, “Sell down to the sleeping level.”
- Get back in (when you’re ready). After a large drawdown, you may be afraid to get back on the dance floor. That’s fine. Perhaps you paper trade. When you put on a smaller portion of the positions than you normally would. The first goal isn’t to get back what you lost. And, trade the amount of positions typical for you, but keep the size small until you build confidence.
Drawdowns happen. But so do profits. Accepting that things change is crucial. So after a drawdown, move on. I like to say I’ve given up all hope of having a better past. So, remember the lessons from the past, look to what you can do now, and build towards your future.