One thing that makes trading interesting is that no day is the same with one another. You will learn different things every day. You will also make different amount of money every day. Today, you might make a good profit and tomorrow make your biggest loss. The same happens even to the best investors. In the recession that happened in 2008, many famed investors such as Kenneth Griffin and Dan Loeb reported their biggest losses. Before that, they had a clean record of excellent performance. In your trading, there are days you will go without making a profit. How then are you supposed to deal with your drawdowns?
First, you need to understand that losses are part of the trading game. Remember that when you make money, it means that someone will have lost the money. A person’s loss is another person’s profit. Also, remember that you are trading with very intelligent people, some who have PhDs in finance and mathematics. This means that you will occasionally lose money. What you need to do is mitigate yourself from making huge losses. In every trade that you open, you need to have in mind the amount of money you expect to make or lose. Then, you should have in place the exact stop loss. A stop loss is a level where the trade will be stopped when you are making a loss.
Some traders believe that they can stop their trades when this point is reached. However, the fact is that some events can lead to aggressive movements in the market which can lead to more losses. For instance, when a company’s beloved CEO announces that he will resign, the stock will likely go down as investors digest the news.
Second, you need to take every loss in a positive manner. As a new trader, chances are that you will be disappointed with your loss. This is normal. However, as you become an advanced and disciplined trader, you will start taking your losses positively. This is because when you open your trade, you have already aligned yourself with the fact that you can lose the trade. To mitigate this, you only open a trade which you risk only a small percentage of your account. The ideal amount to risk should be below 5% for new traders.
Another way to deal with a big drawdown is to take time off from trading. As a trader, it’s always good to take some time off. You should not spend this time crying or in self-pity. A pity-party will not help your trading at all. You should spend this time looking at your trading diary and identifying the mistakes that you did. Alternatively, you can take a trip and focus on other things. Doing this will help you have a fresh mind when you start trading again. As you restart your trading, chances are that you will be a better trader because you will avoid repeating the same mistake. Remember, experience is your best teacher.
You can also deal with this problem by talking with someone who has gone through this. Having a mentor who has been there, done that will help you navigate the murky situation. If you have a successful mentor, chances are that they have been in your position before. They will give you a first-hand guide on how to move on.
One thing you should avoid is doing something irrational. You should not do something randomly with the aim of recovering your money back. This means you should not open a trade in the opposite direction. In many cases, when you do this, you will often lose your money. Therefore, do whatever you can to stay sober and make the right decision.