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In this lesson, we discussed the inevitable and avoidable retracements that traders experience. Failures are part of the deal, and there will be many periods of failure in a career, but how you handle them can mean the difference between success and possibly even the undoing of your career.
There are two types of retracements – normal and problematic.
Normal drawdowns
A normal drawdown is a natural function of trading ups and downs in relation to market conditions, small deviations from our trading plan, or both. These are not considered threats, nor should they be, but must be managed to avoid them becoming problematic drawdowns that damage not only our trading accounts but our psyche as well.
There are a few things we can do to deal with normal pullbacks to prevent you from digging a hole that will set you back for a long time or worse. It’s not just about money management, it’s about making sure you follow a repeatable process that involves trading according to your trading plan.
The first thing you should do when you encounter a pullback without problems is to do some self-examination and make sure that you are actually following the plan and process that you have identified as part of a successful trading plan.
Your strategy doesn’t always work, and it’s less successful in different market conditions. This may make it difficult for you to stick to the plan, but sticking to the course is important.
Even if you don’t lose a lot of money, you may want to consider reducing your trade size, as this will not only help control drawdowns, but will also allow you to trade more objectively, as there aren’t any significant risks.
Remember, you are not only protecting your funds, you are also protecting your trust.
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Problematic drawdowns
Problematic retracements do occur, but should be rare and certainly not lead to catastrophic retracements. The retracement in question is not the end of the world, although it may feel so at this time. If done right, the trader can quickly restore himself to a state of confidence that allows him to lose and move on.
When you’re going through a really tough time, you’ve reached the threshold of maximum pain, and the first thing you do is get out of it. Reduce all trading risk and balance your account. As soon as the bleeding stops, you will immediately feel relieved.
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Take some time away from the market to relax. It can be difficult because your competitors may be forcing you to keep going, but taking a break not only helps relieve stress, it also gives you vision.
The next step is to determine the reason for the pullback. Multiple problems often occur at the same time, so it’s important not to try to fix everything at once once you’ve identified the problem. This just leads to more frustration and more losses.
Instead, start with the most important question that might be bothering you. Often, large losses are the result of losing control over risk management. Every good trade begins and ends with proper risk management. You may be trading too much or not sticking to your stop loss.
It could be that you trade too much or act impulsively. Many traders can identify good trade setups but lack the discipline to only make “good” trades. This overtrading is a major killer of success, as low-quality setups can eat away at the profits of steady trades. Excessive trade must be curbed.
One way to do this is to create a checklist before stepping in, ticking all the boxes for a good facility. It takes discipline to stick with it, but it’s a way to hold yourself accountable.
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There are of course many other issues, including personal ones, that can affect your trading, but in general you want to a) identify the problem and b) find a solution before resuming trading.
Once you’ve found a solution and made a plan to get you back on track, you’ll want to come back slowly. Your goal is to make good trades and restore your confidence, rebuilding your lost self-efficacy. By doing this, you can position yourself to make up for lost money. But if you try to make up for any losses quickly, you’re creating a recipe for disaster.
Summary:
Accepting failure is part of the game
There are normal and problematic retracements, know the difference
If this is a normal drawdown, stick with your gun (consider downsizing)
In questionable retracements – get out of the woods, reassess, come back slowly
Avoid troublesome pullbacks (using circuit breakers) with careful advance planning.
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