Skip to main content

The Three Big Reasons for Trading Drawdowns

Great traders, like great poker players, know when to play and when to fold their cards and wait for something worth betting on.  Too often, the love of trading expresses itself as a need to trade, and the need to trade leads players to play the wrong hands.  Worse yet, the need to trade leads players to sit at the wrong tables.  If you're at the wrong poker table, the hands you draw won't really matter.  

Folding your cards means that you're properly focused on opportunity, but the opportunity isn't present, right here and right now.  Yesterday, I wanted to be a buyer of stocks, but volume was waning through the day.  That tells me that momentum and follow-through on moves will be limited.  I want to buy weakness, not try to ride breakout strength.  If the market is showing me strength and I don't want to chase it, I've got the wrong hand and I'll wait for the pullback to give me better cards.  A great poker player is a patient one.

But let's say that I'm stumble onto a Vegas floor and plop myself down at the first table where I see an opening.  Had I stood by and watched play for a while, I would have recognized that these are experienced sharks waiting for some bait.  Instead, I start playing at the wrong table and become the bait.  That happens in markets when we force our trading style onto markets that are moving a very different way.  If I'm a trend following investor who places bets based on central bank policy and those policies have radically changed from their norm, I'm at the wrong table.  I'm playing the wrong game.

If you're in drawdown mode, it's important to ask if the problem is with your betting versus folding or if the problem is sitting at the wrong table or playing the wrong game altogether.  Are your tactics needing adjustment, or do you need a different strategy?  The most important thing you can do when you're in an unusual drawdown is figure out why you're drawing down.  

There are three big reasons why people have big drawdowns:

1)  They're trading a strategy that doesn't fit the present market;
2)  They're trading the right strategy, but their head isn't in the game and they're not following their strategy;
3)  They're trading the right strategy with a good mindset, but they're employing the wrong tactics and thus not implementing their strategy the right way.

You can't cure a drawdown if you can't come up with the right diagnosis.  Sometimes coming up with that diagnosis means you fold the cards for a while and focus on studying yourself and your trading rather than just studying markets.  Risk management is key because it keeps drawdowns manageable, so that you're sure to have time to learn from them.  The key is folding your cards before you lose your stack.

Further Reading:  Finding Your Trading Strike Zone
.

Comments

Post a Comment

Popular posts from this blog

Women and children overboard

It's the  Catch-22  of clinical trials: to protect pregnant women and children from the risks of untested drugs....we don't test drugs adequately for them. In the last few decades , we've been more concerned about the harms of research than of inadequately tested treatments for everyone, in fact. But for "vulnerable populations,"  like pregnant women and children, the default was to exclude them. And just in case any women might be, or might become, pregnant, it was often easier just to exclude us all from trials. It got so bad, that by the late 1990s, the FDA realized regulations and more for pregnant women - and women generally - had to change. The NIH (National Institutes of Health) took action too. And so few drugs had enough safety and efficacy information for children that, even in official circles, children were being called "therapeutic orphans."  Action began on that, too. There is still a long way to go. But this month there was a sign that ...
Post a Comment
Read more

Benefits Of Healthy eating Turmeric every day for the body

One teaspoon of turmeric a day to prevent inflammation, accumulation of toxins, pain, and the outbreak of cancer.  Yes, turmeric has been known since 2.5 centuries ago in India, as a plant anti-inflammatory / inflammatory, anti-bacterial, and also have a good detox properties, now proven to prevent Alzheimer's disease and cancer. Turmeric prevents inflammation:  For people who
Post a Comment
Read more

Austerity-A Fancy Word for Destitute.

The reason for this post is not for the folks who have been caught in the first wave of personal economic hard reality, but the next wave. Regardless of the optimism espoused by grinning leaders and sycophant press, we are entering the final stage of global economic collapse. It began in 2008 and was forestalled for five years with fudge putty, but the weight of global indebtedness cannot be propped any longer and the final crunch is imminent. Austerity measures herald the final throes.  Indications of coming austerity.   Austerity measures are the final last ditch effort, futile or not! Back in the day many of us old-timers went through periods of "hard-times". In retrospect I realize there is no comparison to yesteryear hard times and today's version. Back then, expectations were never very high for the working class, there were no sophisticated systems or conveniences anyway. In fact the difference between being "set" or not was about having treats or not. Si...
Post a Comment
Read more