Mastering Drawdowns: Strategies for Resilient Trading

Every trader, novice or seasoned, knows the sting of drawdowns. While they're inevitable, managing them effectively is key to trading success.

Even the most renowned traders face drawdowns. Consider Richard Dennis, the legendary Turtle Trader, who transformed a mere $1,600 into over $200 million. Surprisingly, he experienced drawdowns of over 80% at times so I've read :).

This might seem outlandish to some but perfectly normal to others. His approach worked well for his personal trades, but when he tried managing others' money via a hedge fund, it was a different story look it up its a good story for your mindset.

Ultimately, it isn't the magnitude of the drawdown that's critical. It's your psychological response to it that dictates your success in handling it. Here's how I've personally navigated through drawdowns over the past 14 years:

Focus on the Percentage, NOT the Amount:

Previously, seeing the monetary loss during drawdowns sent me spiraling into panic and fear. The root problem? Focusing on the dollar amount, leading to emotionally charged decisions. Shifting focus to the percentage value changed everything. A 10% drawdown is more digestible mentally than a $10,000 one. This shift minimizes negative emotions and consequential mistakes.

Confidence in Your Trading System:

The depth of drawdown you can stomach ties directly to your trust in your trading system. If you know your metrics and trust your approach, you'll be more resilient. Confidence-building measures include thorough backtesting, simulation trading, and initiating with smaller live trades.

Diversify Trading Accounts Based on Risk:

I've always maintained three types of accounts: low-risk (60% capital, <10% drawdowns), moderate-risk (30% capital, <20% drawdowns), and aggressive (10% capital, high drawdown limits). This structure is possible thanks to the faith I have in my trading approach.

Prioritize Mental & Physical Wellbeing:

Trading is grueling, both mentally and physically. To stay sharp, you must be in peak condition. Regular exercise, like my 12-year practice of Muay Thai, offers stress relief. Meditation, another tool in my arsenal, helps maintain calm and focus.

Trading is a journey, with its fair share of ups and downs. What I've shared is my compass through the stormy seas. Hopefully, it lights up your path too.

Happy trading!