Picture yourself after one year of starting to trade your live account. You are currently at a draw down of 10% and you have been losing for most of the year, reaching the last equity high sometime almost 8 months ago. Looking at your account – which now reminds you of your 401K in late 2008 – is becoming difficult and you are seriously thinking about calling it quits and changing your strategy for a better one. Should you give up ? Should you continue ? Pay attention to the following tips to find out.
1. Ask if the current situation was predicted. The first thing you need to ask yourself is a very simple question. Do simulations or previous live trading predict this outcome ? If your simulations or your previous live trading predicts that you will be in an extensive and deep draw down period then there is no reason for you to panic since you are within a predictable scenario. This is part of your trading system’s way of behaving.
2. Do not rely on faith. I simply cannot stress this enough but successful trading is not about having a successful strategy and trading it without any observation hoping that you will eventually go out of a draw down period. Some strategies do fail and relying on faith will only make you empty your account. Your best ally when it comes to dealing with draw down periods is NOT faith its actually knowledge. When you know your trading system and you have confidence, things will be MUCH easier to do.
3. Have a worst case scenario. All good strategies which have worked in the past may reach a level of draw down where you are not willing to trade them anymore. This is the reason why you always need to trade strategies taking into account that future conditions will bring you a draw down of about double the historically predicted. No only does this allow you to be much more conservative but it allows you to have a “worst-case scenario” you’ll be able to handle. Also, don’t be flexible with this outcome, if the worst case is reached, you quit trading that system and that’s it. The system is too risky to be worth trading now.
4. Understand what you are trading. Maybe the paramount reason why people fail to follow long term profitable strategies is due to the fact that they don’t have the necessary knowledge and confidence to go through draw down periods. Having predicted risk and profit targets before getting into any system is absolutely vital for you to succeed. Some people trade a given strategy for months without even knowing its risk and profit potential, a very dangerous thing to do when dealing with draw down periods is of inmense importance.
5. Look and Analyze. I know that it may be depressing to look into a two year account which has had nothing but draw downs – something bound to happen with strategies such as the Turtle Trading System – but in the end this is something you need to learn to live with. Open your account, analyze what is wrong and understand why you have been losing. Analyze the predictability of this outcome and match it with your worst case scenario and understanding of the strategy. Ignoring your account and pretending the draw down does not exist is NOT a good thing to do. It is a practice – human but childish practice – which in the end will only lead you to a lack of understanding and willingness to pull the plug when you simply shouldn’t.
So as you see, it is actually not very hard to know what to do to weather those draw down periods. In the end, what you need is simply to have a plan, understand it and follow it. You need to have clear profit and risk targets, a worst case scenario which account for worse than historical performance (of course, the future may be worse) and a clear mindset in which you understand that draw downs are real and you WILL have to go through them.
If you would like to learn more about automated trading systems and how you too can be successful in automated trading using sound strategies with realistic profit and risk targets please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !