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What to do about an extended period of losses.


Losses happen - I just went through a pretty large drawdown relative to my overall annual performance. For many, the pullback of early February was rough. 

Here’s some perspective :)

There are a lot of unknowns - for example, the duration of your drawdown. It’s impossible to know or predict how long it is going to take for your account balance to get back to where it was, or how long it is going to take to recover your losses. Keep in mind that a 50% drawdown on an account is going to require a 100% return just to get back to break even. The realization of that fact can be disheartening and can cause you to feel some strong feelings of anxiety. 

The key, in any drawdown is to focus on your trading rules. You can get this information by BACKTESTING. There’s no way to make money in the market without an edge. And edge allows you to create alpha/profits. Without an edge, all you are doing is gambling. How do you know that you have an edge?  Build and test a system. It’s that simple. Your system (and the back-testing of it) will determine if you have an edge. The other way to determine if you have an edge is the test of time - literally trading a strategy over time. The numbers don’t lie. 

If you don’t KNOW if you have an edge, here’s what you should NEVER do. 

While you're losing money, and you’re helplessly watching your account balance fall - your instincts might lead you to begin trading more frequently. We are wired that way. Activity/effort as a response to stress is in our DNA. If we are in water, and we are sinking to the point that we can’t breathe, we kick and swim harder. That’s our natural response. Part of being a successful trader is to work EXACTLY against your default nature - do the opposite. Greater frequency of trades doest not equal greater opportunity. Changing what you do is a sure fire way to compound losses and make a bad situation worse.  Behave consistently as you would when you're up 20%. All you do is follow your rules. Take it one day at a time.  Meditate on how you feel when you have to be patient. You might feel all kinds of emotions, but don’t try to trade harder, to trade your way out of it. That’s a loser’s game.  


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