How To Get Out of a Trading Drawdown
OK so I'll admit it. Sometimes trading doesn’t go well for me. There are months where I am in a drawdown. Sometimes a big drawdown. Sometimes a stomach-churning, confidence-sapping, why-am-I-doing-this-again? drawdown.
Even if I couldn’t see the negative P/L staring at me from the screen, I know I’m in drawdown because I can feel I’ve lost confidence in my strategy, I'm feeling negative and I find myself being more and more irritable with those around me.
When this happens (and I’m pretty sure it’s going to keep happening from time to time), I know it’s time to activate the 'How to Get Out of a Trading Slump' protocol! Maybe you do these things too, or maybe there are a couple of ideas here that you can try next time you get into a trading slump.
So, here are 6 things I (try to remember to) do when I'm in a trading drawdown.
1. Remember I've got out of drawdowns before.
If you've been here before and got back on top then there is every reason you can do it again. I believe that trading is cyclical. My equity certainly moves in cycles of steady increases followed by stagnation and decreases followed by increases again. Life is cyclical, so why not the markets and trading profits?
If you have got out of a trading drawdown before, can you remember what you did last time? If you have a trading journal, with notes of your emotional state as well as details of trades, this will help you big-time. Get out your trading journal and have a look through what you did last time you were in drawdown. It might seem obvious, but if it worked, do what you did last time. Knowing you've got out of a slump in the past will give you the confidence that what you did to get out of it worked, otherwise you wouldn’t still be here, right?
2. Take a break
Sometimes the best thing I can do is to switch off the screens and walk away for a while. It might be a few days, a week or more. This can be hard initially, as my instinct is to get back on top and the only way to do that is to trade. But, trading from a place of such negativity will more likely lead to revenge trading, overtrading and frustrated trading.
Never forget that being in a drawdown can play havoc with the mindset needed to trade well, so taking a break is a great way of gaining perspective and resetting your mindset. A bit of distance can work wonders and if that distance includes you doing the things you love, then your trading drawdown won't feel like the nightmare it did and you can return to your desk fresh and ready to start trading again.
If your time away from the charts also includes moving your body (running, hiking, dancing, rowing, biking), then you will feel even more energised and refreshed. Add being outside to the mix, and you will feel even calmer when you return to your trading desk.
3. Reduce stakes massively
OK, you might already have a money-management strategy that includes reducing risk when in drawdown, but I'm talking about a MASSIVE reduction in risk here. e.g. If I was trading 10 lots I would go right down to 1 lot or less. There will of course be a little voice in my brain saying something like ‘how on earth are you going to get back up to positive territory if you are trading so small?’ But remember, the point of this next phase of trading is not to make the trades that will get your account back up to the surface, but to build your confidence in your trading strategy.
When in drawdown, increased fear sets in that I will lose even more money and even possibly (shock, horror blow my account. So, risking so little frees me from that fear of getting into an even bigger drawdown. It gets my perspective back on an even keel and means I can trade from a place of calm again. Then, once there is a string of good trades behind me, I’ve stuck to my strategy and shown to myself that it’s working, my confidence improves. A series of good trades sets up a positive feedback loop in my brain which encourages good trading and when I’m ready, I can increase stakes again.
This process might take a while, but the more you do it and work through this cycle of getting out of drawdowns, the quicker this reduced-stakes phase becomes, as you have more and more proof that it works.
4. Look after my body
I don’t know about you, but I’ve noticed that when I'm suffering a big drawdown I tend to let my health slip. I might start eating more junk or pouring myself an extra glass of wine in the evening, as a way of comforting myself or helping to switch off from the unpleasant feelings of being in drawdown. This behaviour might even feel like self-compassion at the time, and there is an element of self-soothing in these behaviours. Giving myself a break and saying I don’t need to go for a run, or chilling in front of the TV instead of getting to Yoga is fine now and again but ironically, getting out and moving is the best thing I could possibly do when the weight of a drawdown starts getting me down.
Looking after my body through decent sleep, good food and enjoyable exercise means my brain is going to be healthier and my mindset more positive about the future. It creates a positive feedback loop with a better outlook and better trading decisions.
It might feel really hard to prioritise sleep, food and movement when you’re feeling defeated, but they feed into each other. If you find sleep hard, for example, then fresh air, exercise and good food will help you sleep better. Being well-rested will make you more likely to get out and exercise and have the energy to make a proper meal. We’re talking about cycles and loops again!
5. Review all trades again
It can be painful to go through the trades that have led to a big drawdown but it's important to face them head-on (after a break if needed - see above!) Were they all taken according to my trading plan? Did I get greedy? Any revenge trades? Any pattern with previous drawdowns? This is just an observational exercise, so no tweaking of your trading strategy and no regrets. No should-haves or criticism, just look honestly at what happened. If it helps keep you detached and non-judgemental, imagine you were doing this for a friend. Go through the trades as if they were taken by someone else.
This assumes that you have a thorough trading journal of course, but if you don’t yet, start one now. A journal that records not only trades, but any emotions around that trade (before taking it, while it’s live and after closing it) will be a huge help when reviewing what went on during a drawdown. Maybe the drawdown is just part of the statistical distribution of losing trades or maybe it’s due to you deviating from your strategy. However, there’s no way you will know which is it without a trading journal.
6. Come up with a plan
This is the point where a lot of traders throw their strategy in the bin and pick up a new one, only to repeat the same cycle further down the line. It’s so tempting to go through the trades that have brought you into drawdown and start thinking ‘if only I’d done X, Y or Z instead, I wouldn’t be in drawdown’. This is completely normal and it actually makes us feel better. But, if the drawdown is just a part of the normal cyclical nature of your particular strategy, then now really isn’t the time to change that strategy.
Now’s the time to come up with a plan going forward about how you are going to behave. What habits are you going to embed in your trading routine? How are you going to approach the market? So many traders spend a huge amount of time tweaking entries and exits, changing indicators and instruments, when working on their behaviour would make all the difference to their trading results.
My plan going forward might include less trading, avoiding the temptation to trade lower timeframes, making time in my schedule for healthy habits, as well as simple improvements such as setting alerts so that I don’t have to stare at the charts all the time. As most of my big drawdowns in the past have been due to overtrading, my new plan could include reduced trading hours, less instruments or general simplification of my trading plan. Setting up a new trading routine going forward will fill you with positivity and get you excited about trading again.
And remember, this will all happen again - that’s trading. But, once you get out of this trading slump, you will know what to do next time, and each time you do it, it will get a little easier and the cycle a little less unpleasant. An experienced and confident trader knows this and keeps doing to things they know work, including the ‘get out of a trading drawdown’ protocol!
How about you? How do you get out of your trading drawdowns?
Looking for the best way to trade the markets?
Check out my recommended broker.