In a nutshell, how do you cope with emotions that change your mood that are a result of drawdowns? Here’s my situation… I’ve backtested a strategy for a number of years and had consistent strike rates, daily/weekly/monthly returns, average profit per winning trade, average number trades per week etc etc. Statistics are roughly the same and consistent time and time again no matter what part of the sample you look at, within reason. I prepared the things I needed such as a laptop, a larger-screened phone, custom indicators with email alerts etc and then went live a month ago after a period of successful paper trading. Since doing so everything has gone to plan as expected - until this week! The first two weeks made typical profits just as they had done in paper trading and just as they averaged in the historical data (I know past results are not indicative of future results blah blah), the 3rd week was break even - no big deal and then this week has been the worst week out of any of my live, paper-traded or 2 year backtested results. It's not so much the losing week that has ruffled my feathers, as there is on average one losing week out of every 4, it's more that the total loss is over double that of my prior worst week, which in itself is nearly double the worst week before that. I of course know anything can happen in trading but this unexpectedly bad period has negatively effected my mood nonetheless. I know factually that I’ve made zero trading errors and executed my trades without hesitation or reservation according to my rules so I know that all this is is just a bad week for the strategy and not me making the strategy miss-perform (novice trading errors are thankfully a thing of the past). My question though is how do you personally cope with your emotions in everyday life in these situations? I am in such a bad mood and can’t shake it, meanwhile annoying my partner in the process. Are you able to just take it for what it is and move on or have you never learnt to cope with it!? Let me know as any thoughts or help would be appreciated!
If you are depending on this money from trading for income that will add stress. If all you have done is backtested the results but not forward tested the results that will add stress and shake your confidence in the system. You did not mention forward testing. If you have not done those things and not done everything needed to FULLY test your system then confidence will start to shatter because you know you didnt do it all. You are still winging it on some level because you think you found an edge but you know deep down you are not 100% confident in your system. Do you know what your max drawdown is in your system and what is the max number of losing trades you should ever get with your system. If not then your system could be fine but you are just in a phase of losing streaks or you may be risking too much per trade. Just like flipping a coin 100 times you may have long streaks of 6 or more tails in a row even though chances are 50% of heads or tails. BUT it sounds like you dont KNOW 100% that is the problem so your confidence is shaken. If you KNOW 100% its the system you would shake it off. My advice would be to stop trading and use your forward testing trades as data and then continue to trade on paper "LIVE" until you have a minimum of 200 trades and then run an analysis on your data. Good Luck
Which markets are you trading? Are you trading off of chart patterns? Are you day trading / short term trading ? Are you using leverage? Are you using money that is living expense money or "house" money ? Do you get enough exercise ? Do you meditate ? Do you have a day job ?
it's quite simple you shouldn't depend on short term trading - you should have money at least for several years and those money should be not in your trading account so if it's not an issue you will be just sad you lost money for which you could buy a car or whatever sadness will depend on size of your loss but will pass in day or week the next thing you should avoid revenge trading - don't even think about getting money back fast the next thing you should do - reduce the size to regain confidence after that very gradually increase it - once of my strategies failed after bringing a lot of profit during the last several years I still believed in strategy but losses were very heavy so I had no choice but reduce size ten times it was it took many months to get back to usual size but being trader you shouldn't be a gambler
Thanks eganon, I agree with what you've said though the paper trading I did was my forward testing. I do have full confidence in my strategy and ability, just my emotions got the better of me. All part of the fun of trading I suppose!
Hi James, yeah I day trade from charts using money I can afford to trade with (i.e it's not rent or bills money!) and have spare equity in my bank account. No day job. I do meditate irregularly and try to be as "present" as possible during trading for focus. I probably don't have as much exercise as I should do, though I do go for a 30 minute power walk every lunch time...
One is able to take it when he understands the meaning of the DD (drawdown) in the current course of trading actions, and how it is a reasonable part of one's strategy. If one is merely executing a strategy that just seemed to do well on past data, and implicitly gone through a curve fitting process, then it's impossible to be calm, as our minds (unconscious, subconscious and conscious) and body start acting in "protective" mode against the perceived danger.
Don't beat yourself up. Today's markets are in uncharted territory with zero/negative rates and totally skewed risk appetites/aversion - this does cause perfectly good systems to have out of the ordinary drawdowns and bad runs. In other words you need to take your backtested max drawdown and multiply it by maybe 1.5 as a good walk forward expectation given today's environment. Whenever I begin trading a new system after extensive backtesting which draws down right out of the gates, I de-lever by a lot but keep it going just to gain confidence that the concept is still sound. After a few weeks or months when my confidence is back I re-lever. Seldom will you see a system that keeps hemoraging week after week, month after month. It usually comes back (unless its some kind of martingale system).
In my experience, after a bad week, that's when the trade needs the most discipline, because that is precisely when your brain will play tricks on you and try to force you to go into "gambling mode" to get it all back and end the pain as soon as possible, such impatience is not pretty. If you got positive expectancy, and this is something that needs to be verified to be able to trade serious cash, then just let your expectancy take care of you, because if you don't have positive expectancy, then mathematically speaking is only a matter of time until the market takes the money away from you. In trading you need 3 key components to make it. - An edge - Discipline to trade that edge correctly - Money management Lacking any of those and you are as good as dead and this is why most people fail in this business. I happen to have good discipline and solid money management, unfortunately my positive expectancy is positive but minimal, and that prevents me from being very wealthy, but I'm actually happy that I have nailed down two of the three key elements. As as bonus, a great Maiden track