Archive for category Miscellaneous

I trade futures with Optimus Futures and I read an interesting post on their blog about drawdowns  I thought I’d share it here as this is a subject that doesn’t get talked about much even though it’s a big part of every traders daily life.

Being a trader means that by default you will at some point experience draw-downs. This can be the drawdown of your current live trade or the drawdown of your whole account balance once you have closed all trades.

Drawdowns are impossible to avoid and there is no point wasting energy trying to avoid them as some traders do. It is irrelevant how effective your particular trading strategy is or how good a technical analyst you may be, you will continuously experience negative equity on a regular basis.

As drawdowns play a vital role in your trading psychology, it is best to build up your mental framework sooner rather than later to be able to deal with them. Until that time you will likely fail as a trader (or not be as profitable as you could be) as they cause a massive number of trading errors. The very process of being in negative equity evokes fear which in turn makes inexperienced traders to not act in their best interests.

Here’s a quote from Matt Zimbergs article on the subject:

There are no “methods” to deal with drawdowns; rather it is the conscious psychological effort to recognize that regardless of how good your system/method is you will experience times where you will lose money. A trader may sometimes do everything “right” and still experience a draw-down.

The inability to factor in drawdowns when formulating a business plan for trading may entice a trader to drop trading methods in favor of other trading methods just to repeat the same cycle of dumping a method that could potentially be successful because of a sequence of losing trades.

Learning to deal with drawdowns is one of the first obstacles to overcome when new to trading so if that includes you check out the full article and for further help in trading without fear I’d recommend to read Mark Douglas’s “Trading in the Zone”.