• iTunes
  • Twitter
  • Facebook
  • Google+
  • Instagram
  • Youtube
  • Email
  • Home
  • Courses
  • eBooks
  • Library
  • The Empowered Trader Club
  • BST LIVE
  • About
Better System Trader

Better System Trader

Better System Trader is the podcast and blog dedicated to systematic traders, providing practical tips from trading experts around the world.

5 top tips to accepting painful drawdowns

Sometimes it can be really tough to love trading.

You put all that time and effort in, but every now and then the market is looking to kick your butt.

For some traders, the markets have been in a serious butt-kicking mood lately.

So, for all those out there suffering from broken hearts trading accounts this Valentine’s day, I thought I’d share some quick tips that may help to ease the pain of drawdowns.

Unfortunately, there’s not much we can do to avoid drawdowns (without breaking the law). As Scott Phillips said in episode 59:

“If you want to avoid drawdowns, stop trading.”

Drawdowns are a part of trading so we have to learn to accept them, but how can we do that?

Well, the first thing is to have the right expectations up front, here’s some advice from World Cup Trading champion Andrea Unger:

“You have to be prepared to live through the drawdowns you experienced in back testing and even a worse one, considering, for example, twice the drawdown as the real limit.”

What if you’re currently in a painful drawdown? There are a few things you can do, here’s a suggestion from turtle-trader Jerry Parker:

“When I’m in a drawdown or losing money faster or more than I think is warranted, I think this is the best rule. It’s really the only rule that is always going to work when you’re losing money. Trade smaller if you’re down 10% and that’s a drawdown that you’re not happy with in the circumstances, then, reduce your position by 20%.

So, have a very draconian rule that prevents you and lessens the chances of hitting another drawdown, 20% for instance that would really make you uncomfortable. It always works and that’s the only thing that works versus more subjective rules.”

Here’s a tough-love tip from Andrea Unger:

“I would advise traders not to look at them. If they make the decision at the beginning, they have to have a plan when they exit the trades, and they need to know, worst case scenario, whether to quit. So they have just to mark it and say “Okay, I have to be advised when this happens, somehow, alarms or whatever,” but to sit and look at the monitor the whole day makes only a bad feeling, so the only thing to do is— you’ve made your decisions? Fine. Place the trades, put your stops and forget about it.”

And if you’re finding it difficult to forget about it, you could try this tip on getting perspective from Nick Radge:

“I’m always looking at the performance data of all these top traders. There is a few websites that you can get the performance data.

And I’m looking at the journeys that they have travelled over the last 20, 30, 40 years, and the whole idea of understanding these journeys is that if it happens for these guys, it’s going to happen for me. The more I can understand what they’ve been through, how they’ve kept their head down and keep pushing forward, it gives me faith that well, what I’m doing is right, all I’ve got to do is keep on doing it.

So, whenever I go into a period of drawdown or a little period of uncertainty or personal doubt which still happens, I always refer back to the data provided by many of those managers and reinforce it, that what I’m doing is okay, it will be okay, I’ve just got to get through that next thousand trades kind of thing.“

And try not to get caught in the recency bias trap, as Alan Clement explains:

“It’s easy when you look at fifteen-year back test and say “Oh, yeah. Well, it goes from the bottom left-hand corner to the top right-hand corner, so, yeah, I could trade that. No problem.” But what you’re not seeing is if you zoom in, all those little ups and downs and bumps and flat spots that you’re going to have to live through day by day by day.

So, I think it’s very easy to fall into what’s called recency bias, where you’re just focused on the recent returns or the recent results. But, I think, having that larger time horizon is going to give you a much better chance of success. So that’s certainly what I try and focus on.”

So, in summary:

  1. Be prepared to experience larger drawdowns than the backtest reports,
  2. Reduce risk by trading smaller when you’re in a drawdown,
  3. Know the point where you’d stop and until you hit that point just keep placing your trades and forget about the drawdown,
  4. Look at the performance of top traders and the journeys they’ve been through to reinforce what you’re doing is ok,
  5. Don’t focus on the short-term results, consider the long-term horizon.

And to wrap this up, some final words of wisdom from Jerry Parker:

“I would say the most important thing is to embrace the systematic approach and really believe that you don’t know where the markets are going.

 You’re going to be much happier at the end if you just totally 100% embrace systematic trading and by following your system and understanding that if you follow the system, that’s the right or wrong, not giving the money back or taking a loss.

 You weren’t wrong if you took a loss, you weren’t right if you made money. You just follow the system to a degree that you follow the system… 

 So, sell your soul, sell out to the trend and to systematic trading, realizing that you really do not know where the market is going. You can’t do any better than your system.”

Happy trading,
Andrew.

PS. Another important tip to managing drawdowns is having a clear process on how to handle strategies that are performing poorly. Bob Pardo from Pardo Capital shares how he manages trading strategies in the Building Robust Trading Strategies Masterclass. You can find out more about the program here.

Happy trading,
Andrew.

Released:

14 February 2018

  • facebook
  • linkedin
  • twitter
  • google+
  • pinterest
  • stumbleupon
Market moods - Reading the signs
Is it really 'all in the timing'...

Related Posts

  • Undiscovered books traders never talk about (but probably should) – Part 1
  • 119 – Fear, Hope and Greed
  • 123 – Will history repeat in 2017?
  • 145 – Protecting capital through proper risk management with Aaron Brown
  • 150 – Looking at markets from different angles – Rikard Nilsson

Next issue (Mar 2021):

Get the new "The Empowered Trader" monthly newsletter, direct to your door (yes it's printed!)

Click here for more info

Want all the trading knowledge of 100+ episodes in a handy ebook format?

Learn how successful traders approach their trading and save time with these handy eBooks of interviews compiled from the Better System Trader podcast.

Click for more info

What pro traders are saying about BST

"What really makes the BST podcast stand out is that Andrew is also an experienced trader and can therefore provide incomparable quality and depth in any interview. Thank you for endless inspiration."

Tomas Nesnidal systemsontheroad.com

"Listening to BST is a requirement for everyone on our team."

Bert Mouler profluentcapital.com

"Andrew seems to have a knack for getting the world's most famous traders to share valuable insights about how they trade for the benefit of the trading community."

Andrew Gibbs halifaxonline.co.nz

"The right questions to the right people at the right time."

Nick Radge thechartist.com.au

"Professional, to the point and relevant content. Better System Trader should be followed by anyone with an interest in our field."

Andreas Clenow followingthetrend.com

"This podcast provides unique information, from real traders, interviewed by an experienced trader."

Kevin Davey kjtradingsystems.com

"I really enjoy the wide variety of topics and perspectives shared in the podcasts and with the interviews done by someone with real life trading experience"

Tim Rea thetradingmasterclass.com

"BetterSystemTrader is an amazing resource of valuable information, Andrew is always able to ask the right question at the right time to deliver the best content possible, a must listen for anybody interested in trading!"

Andrea Unger skilledacademy.com

"Being a trader himself, Andrew drives insightful conversations that uncover gems of practical knowledge that can improve your trading today"

Kris Longmore robotwealth.net

"Better System Trader is an invaluable resource that I've gleaned tremendous amounts of information from over the years. I wouldn't be the trader I am today without having found this resource. Please keep up the great work."

David Bergstrom buildalpha.com

"Andrew has interviewed some great people and I have picked up some useful new insights. His integrity, trading knowledge, light-hearted attitude, curiosity and enthusiasm shine through and enhance each of his podcasts. Given the quality of the information and the price (free!) any serious trader would have to be a fool to not take advantage. Keep it up my friend."

Bob Pardo pardocapital.com

"I really enjoy listening to the Better System Trader podcasts. Even though I am in the industry for over 15 years, there is always something new to learn from these. Thank you!"

Martin Lembak striker.com

"If I had to listen to one trading podcast only, it would be Better System Trader. I am always learning new things and getting research ideas from Andrew’s guests."

Cesar Alvarez alvarezquanttrading.com

"Andrew is a master at asking difficult and relevant questions."

Perry Kaufman perrykaufman.com

"Knowledgeable and credible guests talk about useful topics in an interesting and engaging discussion. What's not to like?"

Robert Carver systematicmoney.org

"The Better System Trader podcasts have become an invaluable resource... There's no other podcast around that covers the subject in so much breadth and depth."

Alan Clement helixtrader.com

"Andrew loves traders and draws the most informative and engaging responses out of them."

Art Collins artcollinstrading.com

Trading stocks, options, futures and forex involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.

© 2015 Better System Trader · Disclaimer & Terms · Privacy Policy · Sponsor