Drawdowns are part of trading so it is critical to keep your emotions in check to avoid the common pitfalls that follow. Angry trades, hope and pray, throwing good money after bad are all mistakes we have to learn not to commit if we are to have any chance at long term success. I’d like to share a couple of ideas that might help in heat of the moment.
- Your net liq is truth. Yes your account had more money in it before the trade went bad, and yes the trade ‘could’ still turn around and make all of the losses disappear, but this is where you are now. The losses now represent capital that is no longer yours. You can’t use it to back margin, you can’t withdraw it, and in reality it only exists as a memory. The money is gone. The sooner you accept this, no matter how painful it may be, the sooner you can course correct and get back to scoring wins again.
- Trying to win back money from the trade that caused the losses is a natural urge. You are constantly looking at your trade to see what you can do to turn it around, average down? Respect the trend and load up the other direction? Each new deployment of capital needs a fresh assessment of the risk/reward. Would you place that same trade if the losing trade wasn’t on your book? Does it have the risk profile of your normal trading? You might find that capital is better deployed elsewhere with your normal risk/reward setup.
- You can hit the pause button at any time. No matter how bad a trade has gone, you can always close it out where it stands, and reopen it later with the exact same risk/reward profile where you took it off. The only cost would be the transaction fees if any. Sold a $1 wide vertical spread for .30 and now it costs .90 to close? You can always sell one in the future for .90 and hope that it expires worthless like your original trade. While you’ll most likely never reopen a trade at the low probability as the one you took off, knowing that you can might help you get to acceptance quicker.