Originally posted by illiquid
How many of you out there who have been trading for some time, have some kind of edge they know they can exploit day in, day out, which makes them generally or even extraordinarily profitable, and have confidence that they can continue earning profits almost each and every day -- how many of you in this category still go through that periodic day of destructive trading resulting in a huge drawdown (compared to your profitable days) simply because you can't stand dealing with a broken string of steady gains?
I'm not quite there yet to able to say I have that confidence in knowing I can produce steady profits each day, which is perhaps why I still encounter big drawdowns every so often -- almost always coming after a winning streak. It seems that continued success will breed a kind of pride which makes accepting even small losses difficult, which can result in overtrading, overleverage, unreasonable profit targets to "make it back" etc.
What's the best way to combat this habit if one trades without the benefit of automatic risk management precautions? Some ideas are: reducing position sizes after every loss, or shutting off screen after a max loss/day is reached -- yet it just begs the question if one's psychology can actually apply these rules when the problem is a seemingly irrational response to losses in the first place. Thoughts?
I lose money net, about once, but no more then twice a month. I used to take the hits you were talking about, but I did several things to change that.
1. I use stops on every order, no exception.
2. Every trade I enter, I know exactly where the loss cut level is, and I use a stop to prevent myself from taking a big hit.
3. If the day isn't going the way I want it to, and I keep getting stopped out for small losses, I cut my starting position in half. If the positions start to work, I size up quickly, and begin using my usual starting size. This allows me to keep my losses contained, so I can make them backeasily when trading picks up.
4. I don't believe in max loss. Just cause the morning is not going well, doesn't mean that the afternoon won't get better. That's why point 3 is important.
5. Everyone once in awhile I still lose my mind and take a big hit on a day, but everyone's human. This happens to me every couple of months, and the size of the hit is usually my average days gain.
6. Keep your days losses to 1/2 your avg. days gain. This way you can come back tomorrow, make back your loss, and put money in your pocket.
7. If you're consistent and you run into 2 days of losses, and you know it's because you're not following your own rules, point 5, then take a couple of days off. It does wonders, trust me.
Hope this helps, it made me into a consistently profitable trader.
