How To Recover From Trading Drawdowns | Momo Trader Day 4

How To Recover From Trading Drawdowns

Trading is a profession full of ups and downs. Given that the stock market is random by nature, there will be periods when you will go through trading drawdowns, even if you have a system with a high win rate. During these periods it is easy to lose confidence in your trading ability and your system, even if it is with a system with an edge.

For this reason, you need to know how to cope with drawdowns, and how to prevent it from leading to emotional trading and poor decision making. Here are some strategies and mindsets you need to have when you are going through trading drawdowns during your career:   

Maintain A Macro Focus

One of the biggest mistakes new traders make is that they get too focused on short-term results. They either feel euphoric after having a decent green day, or they get completely dejected after a red day. Assuming you have proper risk management, one trade will not make or break your trading career. The trajectory of your trading account is determined by your performance over weeks and months. Focus on the trend of your weekly and monthly PNL’s not what happens day by day.

Red Days Are Inevitable

Red days are part of the game. No trading strategy has only winning trades. A few small red days should not concern you if you are a profitable trader. If you have a profitable trading system, do not focus on the money you are making or losing on each trade. Instead focus on following your trading process, that you know that works, and abiding by your trading rules. Red days or red trades do not mean you are a failed trader. 

Recognize When Emotions Are Affecting Your Trading

It is natural to feel emotional after taking a trading loss. The biggest difference between profitable traders and losing traders is how they respond to losses. In order to prevent emotions from affecting your trading, you have to develop strong self-awareness to when emotions are starting to creep into your decision making.

A common way emotions affect your trading on a red day is with revenge trading. Revenge trading is when you force trades to try to make back the money you just lost. Revenge trading most of the time ends up just making your red day worse. You need to develop an awareness of when this starts to occur on your red days.

Step Away From Your Computer

When you notice that you are starting to get emotional during your trading day you need to have strategies for coping with them. My favorite strategy I use for coping with trading emotions during the trading day is stepping away from my computer. Getting away from your screens will clear your head, and allow you to settle down.

Often when you get emotional you start to revenge trade. Taking yourself away from your computer will remove the temptation for you to try to make the money back you lost when you are in a state where you are not making sound decisions.

Some activities that may be appealing to you could be:

  • meditating
  • working out
  • go for a walk and get some fresh air
  • play some video games
  • cook lunch/dinner
  • anything to stimulate your brain to distract you from forcing more trades! 

Do what works best for you.

Take Time Off

If you are going through a more extended period of drawdown, time away from trading may be a great solution. The market will always be there. Some time away from trading will allow you to settle down and figure out what is going wrong with your trading. Use this time to study your trades during the drawdown, and figure out some common themes in your poor trading form, and eliminate them. You should also use this time to go back and look at a period when you were trading well. Figure out what you were doing during this period that was working, and try to replicate this behavior when you return to trading.  

Change Up Your Strategy

If you are in an extended drawdown because your strategy doesn’t have a positive expectancy, you need to try something different. A lot of new traders will go through drawdowns, and keep trying the same thing that is not working, expecting it to work. Months later, they will still be not making money, trying the same losing strategy.

This often occurs when a trader is not tracking their trades, and they are making trading decisions off what they think should work, not based off what their data says will work. If this sounds like you, you need to give up on your current strategy and try something new.

Did you check out day 3 of our Momo Trader Series? We talked about ‘How To Expedite Your Trading Learning Curve‘.

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