How do you handle big draw-downs the next day?

Execution errors, both my own fault or externally related, have hurt me more than once and are psychologically damaging for me personally. Losses due to being wrong are actually not as bad since I know that's part of the game. I agree that it matters a lot as to why the drawdown occurs.
 
Quote from stefan_777:

The fact that someone is running a statistical system based on certain specific past results is discretion too, isn't it? Even if the system works and makes someone a ton of cash, we're all in the business of speculating in future anticipations, and we're not really dealing with a standardized or predictable medium, at least when we compare the market to something predictable like physics or mathematics.

I say it's either discretion, or automated discretion.


I like your idea about the punching bag, I'll have to try that
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well i mean if u look at it that way even in stats there is discretion but depends what u label discretion.
 
good questions - and they need to be incorporated into a business plan. Carter's "Mastering the Trade" is the only trading book I've seen where this is addressed, and it is masterful. For example, here are some of my rules:

1. Max risk/trade=3% of capital (only on high prob setups - else it is 1.5%).
2. Quit any setup for the day after 2 consecutive losses
3. Quit for day if down 4%.
4. Quit for the day after 2 rule breaks (even if accidental).
5. If I drawdown 10%, I trade 1/10th size until I have a positive week. During this time I perform extensive evaluation.
6. Keep ongoing record of all trades and stats on each i.e. current volatility (15min, 1hr), pts made, pts/volatility, stop-loss required, comments etc. I keep this graphed in excel. This keeps me confident about my systems and removes fear when it's time to pull the trigger.

So for example, if I were trading with $100k, I would stop trading once down $4k for the day. Often a crappy day is followed by a good day so I still trade the next day. This all assumes you have developed the discipline to resist the urge to revenge trade. I have a written trading philosophy which help to reinforce this. This is one of the items on my list:

12. Patience & discipline are better values then hitting random jackpots. Patience & discipline assure you that you will get all the good things coming to you in life. Be happy at the end of the day that you have patience and discipline, more so than how much money you made.
 
One of the traders in "Stock Market Wizards," I believe it was Schwartz stated his rule after a larger than average loss was "get smaller, get smaller, get smaller."

Some on this thread may have ice water running in their veins and take it in stride...............after 10 years I still have to regain composure and found this rule to be invaluable.
 
Quote from Bolimomo:

How do you get back to a horse once you fell off from it?

Let's say you are making a living trading and on average take in $1000 a day fairly consistently. Then on some of these days you have sudden draw downs. May be a loss of $4000 for the day. It seems that on that day, no matter what you do you just can't do it right. Everything you touch turned into crap instead of gold. So you swallow it hard and take the losses home.

The following trading day, what do you do?

1) Shake off the previous day's experience. Treat it as if nothing had happened. It's just part of doing business. Trade exactly the same way following your methods which seem to work for you in the long run and bet exactly the same size?

2) Bet heavier to get back the lost ground. You lost big yesterday. But the market had shown you the real direction. You should correct the course. e.g. If you shorted and lost heavily yesterday, perhaps you should consider longing it with a higher wager to make it back quickly?

3) Be very cautious today. Reduce the bet size by half or 3/4. Slowly go at it. Your goal today is to not lose. Then you proceed to aiming for a $200/day the next day. And then $400/day the next day. Then back on your track to your regular goal?
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Hi Everybody, I just signed to this Forum, is quite interested.
Bolimomo:
1) do you have system you yourself proved well working (not others people system you did not check) ? Do you completely trust this system ?
2) if answer is yes do what I do: escape into the system. Follow it to the last dot (BTW: for me system consist of; 2)mechanic; methodology of entries and exists - about 30%, 2) money management another 30%, and third ad most imprtant component of my system; psychology matured to trading -60%)
For me took 4 years to just develop such system and start making small money conistenly after ( and lossing some in the process).
If you have such system and you did follow it, it was just statistics, no system is 100%, 70% is good.
2) so escape into your system, maybe less lots (FX) or contracs(stocks) and trade as before.
3) but few days later go back to this lost and try to analize, with cool head with perspective, what went wrong. Was it only statistics ? or your mistake ? cutting cornes? If you made serious mistake (like jumping too quicly, before your set-up because you feel good about this trade) you already paid and learn not to do it.
(Until next time - but remember it costs $1000 :)))

3) if you don't have this kind of system - sorry you should not be trading with potential for loss $1000 (I assume it's substantial figure for you..). I would recommend bo back to drawing board, work/improve/rework you system, scale down your trading and try again... Sorry this is Trading for Live :))
I hope it helps.
Let us know how it worked out.

Januszon
 
Quote from januszon:


Bolimomo:
1) do you have system you yourself proved well working (not others people system you did not check) ? Do you completely trust this system ?
.....
Januszon
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Thanks for your comments Januszon. Yes I do have my own system developed over the years. It is a discretionary approach. I don't use program trading.

My approach got me 140%+ in 2008 while the market was down by 45%. So far this year - 2009 Q1 - I am at 24%. I do trust my approach over the long haul. I just need to improve in minimizing the big drawdowns.
 
Quote from Bolimomo:

How do you get back to a horse once you fell off from it?

Let's say you are making a living trading and on average take in $1000 a day fairly consistently. Then on some of these days you have sudden draw downs. May be a loss of $4000 for the day. It seems that on that day, no matter what you do you just can't do it right. Everything you touch turned into crap instead of gold. So you swallow it hard and take the losses home.

The following trading day, what do you do?

1) Shake off the previous day's experience. Treat it as if nothing had happened. It's just part of doing business. Trade exactly the same way following your methods which seem to work for you in the long run and bet exactly the same size?

2) Bet heavier to get back the lost ground. You lost big yesterday. But the market had shown you the real direction. You should correct the course. e.g. If you shorted and lost heavily yesterday, perhaps you should consider longing it with a higher wager to make it back quickly?

3) Be very cautious today. Reduce the bet size by half or 3/4. Slowly go at it. Your goal today is to not lose. Then you proceed to aiming for a $200/day the next day. And then $400/day the next day. Then back on your track to your regular goal?
More...


That is an interesting question.

The answer is probably in the way you look at the P&L. I have been trying different approaches for a long time and still have not found a definite answer after many years. Also, it has been hard for me to say if things get more difficult after a loss because of psychology or because market behavior had changed and my rules have temporarily gone out of style


I went through the 10 pages of posts hoping to find something useful, but it seems the some of the folks did not even understand your question which make me think some of the people posting here may have not traded for long or successfully as a professional
If you came of with a possible answer or even suggestions please do post
 
The answer to the OP's question is as obvious as the problem staring him in the face.

The comments given here should go far in assisting him in his problem, which is one purely of emotional [over]trading and lack of money and risk management skills.

Does that Help?
 
Quote from MandelbrotSet:

The answer to the OP's question is as obvious as the problem staring him in the face.

The comments given here should go far in assisting him in his problem, which is one purely of emotional [over]trading and lack of money and risk management skills.

Does that Help?
More...

As is the case with any trader, big drawdowns are caused by EMOTIONS. The market doesn't know you bought or sold, it is just a river, you are the leaf. If you try to go against the river it will drown you and just flow around (or over) you.

I blew up many, many times because I just HAD to be right. Would you rather be right or would you rather be paid?
 
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