When the Expected Draw Downs Come – Dealing With Loses When you Live from Trading

Perhaps the most difficult aspect of forex trading is the fact that loses happen and they constitute a vital and necessary aspect of the trading experience. During various posts I have talked about the nature of loses in forex trading, their origin and their need as limiting factors of the massive exploitation of mechanical trading strategies. Today I want to talk to you about a more personal aspect of loses and the way in which I deal with draw downs as a vital part of my career as a trader who lives from the performance of his trading strategies. I will talk about the ways in which I have dealt with draw down in the past, the plan I have laid out and how this plan comes to life in reality when that creepy monster known as a deep-long draw down period shows his sharp teeth around the corner.
Truth be told, I have never been good at dealing with loses. Perhaps it is because I am an emotional man or because I sometimes view my success through my trades but I have always dreaded and hated losing periods. Of course, I am just a human being and losing is not easy for anyone and it especially didn’t feel easy for me. When I began trading I used to take a serious emotional blow every time I faced a draw down period. I didn’t react by getting angry, I actually got depressed and frustrated as I saw how my money started to evaporate from previously profitable accounts. The emotion filled trading that followed only led to deeper draw downs and to even deeper feelings of anguish as more and bigger loses appeared.

After developing my core knowledge about the market and going through the extensive process detailed through a good portion of this blog, I became much more conscious about the nature of draw down periods and I realized that they are THERE and that they are necessary for the trading of profitable systems. It actually comes down to a very simple concept, without the draw downs there simply wouldn’t be long term profitable systems because the market wouldn’t be able to discourage their trading through the cycle I detailed a few posts ago.

However one thing is to know that you will face a 250 day long 20% deep draw down period and another thing is to take your account ( or even emotionally worse, your managed accounts) through this psychological journey. The first time I faced the draw down monster I almost had a heart attack. I traded the God’s Gift ATR through a break-even/losing period of several months before a new equity high was reached. I was happy that I followed my plan and that I reached my profit target and I was even more happy about having defeated my own inner challenge of draw down survival. Understanding played an ESSENTIAL role here as I would have never done this without fully knowing what I was getting into. Definitely this is one of the main reasons why I consider understanding an absolute requirement for success in automated trading, at least for me it was.

Now after some time of achieving this ideal status where living from automated trading is a reality (and hopefully it will remain this way :o) !!) , I have a clear plan to deal with draw down periods and with my profit levels so that I can sustain the expected and worst-case scenarios of all the accounts I trade and manage without risking my living style. My plan has the following simple outline :

  • Keep enough savings to live at least for 1 year without ANY income
  • Always respect the worst case draw down scenario
  • Always evaluate the extent and depth of draw down periods against the historical standards
  • Keep living standards at 50% of expected profit level
  • On every month, spend at most 50% of income, invest 25% (forex), invest 25% (other)
As you see my plan attempts to attack possible bad scenarios by making sure that I spend less than what I make, reinvest part of my income and diversify my investments. I always apply the Asirikuy mantra (understand, expect and evaluate) and I keep in mind that past performance does not guarantee future results and that certainly the worst case – even if unlikely – may develop. It is clear that every long or deep (or both !!) draw down period on any system is a challenge and the success or failure of a trader depends on how this challenge is tackled. If you tackle it with emotions and improvisation you will get financial ruin while if you tackle it with understanding and planning you will be able to make it to the other side.

As a person who is fully dedicated to the field of automated trading I can tell you that – for me – the hardest part of trading Asirikuy systems is the psychological pressure that draw down periods bring, a pressure that is always existent but that I become better at handling as I develop a better understanding of my automated trading systems, their draw down periods and the foreign exchange market.

If you would like to know more about my journey in automated trading and how you too can design your own likely long term profitable automated trading strategies 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 !

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