Having a sound money management strategy is very important in order to avoid the risk of ruin from losing streaks and drawdowns.
However, please
bear in mind that although you might have implemented strict money management
rules, you still cannot avoid drawdown at all. Drawdowns are inevitable.
Therefore,
you need to know how to stop the drawdowns, so as to avoid the risk of ruin and
allow you to survive a period of losing streaks and drawdowns.
However, the good news is, to stop a drawdown is simple. All you need to do is just stop trading. That’s it!
But, what’s next? What can you do when you stop trading?
You can still
continue to monitor the markets, your favourite stocks and indicators.
By not being in the markets, you will
be able to sit back and analyze the situation without the emotions.
Here are some of the things that you can do while you stop trading:
1) Make sure that you fully recognize
and understand all of the reasons that caused your drawdown.
There are 2
possible reasons:
a) Yourself
When you experienced
a drawdown, you should always look within yourself first and review your recent
trades or trading journal, to ensure that nothing has recently changed.
Ask yourself questions,
such as:
* Have you
been following your trading system/rules and manage risks properly? Did you
break or modify any of the rules knowingly or unknowingly? Did you “force” any
trade?
* Any changes
in your trading styles recently?
* Is there
any major life event that affects you, physically or
psychologically?
* Any
distractions that hinder you from focusing?
b) Market Conditions
Market
condition may affect the performance of your trading style/methodology.
Sometimes,
there are some market conditions that are more favorable to your
style/methodology and give you a better chance to be profitable, or vice versa.
But when the
market changes, it becomes more difficult for you to trade in an unfamiliar
conditions.
When that
happens, you may need learn and understand the market condition better and be
extra careful / selective in your trading in the sector or stock selection,
market timing, etc. Sometimes, it is even wiser to stand in the sideline and
watch the market, rather than jumping in an unfamiliar market condition.
2) Once you have identified the causes of your drawdown and made some plans / strategies / rules to tackle the problems, you can start again by doing paper trading to test it. Remember to keep records for every single trade you made in paper trading.
Note:
You can find some useful tips for paper trading from the earlier article: 5 Tips For A More Effective Virtual / Paper Trading
3) When you’re consistently profitable
in paper trading for some time, you can then slowly start with real trades again to engage your
emotion into the trading. Start with small trades first. When
the trade is profitable, you can gradually and slowly increase your position
size.
If you encounter losses again, then
scale back in your trading, or go back to paper trading, if necessary.
4) Repeat the above steps until your
trading performance improves.
Remember to always keep records for
every single trade, including the notes about market conditions. Learn from the
past experiences, so that you can avoid the same mistakes and would be better
equipped to tackle the future drawdowns.
To view the list of all the series on this topic, please refer to: Money Management / Position Sizing
