Drawdowns in trading: why and what to do?

Ted Capwell Updated:

Drawdowns in trading are an integral part of the trading process, which is of great concern to traders, especially beginners. The fact that trade with 100% profit does not exist. Losses, like profits, accompany everyone, even the most experienced. Moreover, drawdowns are considered a very normal part of trades of each trader. Some people accept this pattern, and some are indignant about this. As a result, traders lose big ones under the influence of emotions. Actually, that’s why, it’s worth mentioning the topic of drawdowns and how a trader should behave.

Drawdowns in trading: why and what to do?

Reasons for drawdowns in trading:

– The most common reason for drawdowns in trading is the psychology of trading. Often it is the emotional state that provokes the emergence of drawdowns, or rather, how well a trader is able to cope with emotions. The result will be influenced by gambling, greed, the desire to raise rates and win back losses. First of all, a trader must learn to control himself and fight when such feelings arise. Otherwise, he himself will lead to a drawdown.

– Lack of a functioning trading system or effective entry rules. This is the second main reason that leads the trader to drawdowns. Of course, intuitive trading takes place, but only if it is based on many years of experience of trial, error and victory. Relying on luck and intuition is not 100% here. As practice shows, this is not followed by everyone, especially novice traders. Beginners are better at picking up a trading strategy, trying to deal with it and gradually apply it to trading. They need to approach the issue of discipline especially well. Otherwise, it will be impossible to avoid drawdowns.

– Market changes are one of the most important reasons for the appearance of drawdowns. The nature of the market is often volatile and unpredictable. I have a working strategy you can not discount the volatility of the market. Even having positive results for a long time, drawdowns are not excluded. They appear as a result of changes in the market and, as a result, inefficiency of the trading strategy. All this means that the trader needs to correct the chosen strategy, given the very changes in the market that led to the drawdowns. Nothing wrong with that. After all, this is a completely natural situation – if the market has changed then the strategy of trade should change.

But, as we have already mentioned, the appearance of drawdowns is a normal phenomenon, which can be prevented by risk management, which can’t be said about their aggravation. Because, this is due to the loss of self-discipline, control over emotions and the emergence of a desire to recoup. It is always important to cope with your emotions in time and remember that there is no trading without any drawdowns.

Recommendations for drawdowns in trading:

First understanding that the magic method does not exist here. Each individual case has a separate exit path, since each trader is individual. But like the main reasons for drawdowns in trading, there are three councils.

– We work on our emotionality and reactions to drawdowns. A great way here will be to take a time-out and rest your brains from trading. Break, it will perfectly help to bring emotions in order. Understand, you will not miss anything in a few hours, which is quite enough to cool down. After all, you are still waiting for a lot of superb opportunities, and missing one or two during the absence of nothing means. better to cope with the heat of passion than to lose all the money.

– Next, we are talking about self-discipline, which helps to develop the diary of a trader. Although this is trite, but really the most simple and effective way. After resting and coping with emotions, start recording deals and results. Here it will be possible to follow your mistakes. Here you can not be lazy, understand the game is worth the candle, and every carefully recorded transaction in the future will indicate the right path. Many people think that this is a waste of time and they do not need a diary at all. He is not at all like that, because even masters of trading keep their diaries for years. It is especially important to keep a diary when the trader buries deeper and deeper into a drawdown.

– The question regarding the psychology of the trader, dictates a not quite standard, but effective method – the physical load. This is an excellent method to lower steam. Try physical exercises in response to every oversight or loss. Some just have a few squats or push-ups to release all negative emotions and thoughts. Thus, the trader takes himself out of the stressful state. even those who for various reasons do not have the opportunity to engage in physical activities, can try respiratory equipment. The main thing is always to start trading with a cold head.

Therefore, remember discipline and perseverance. Develop your willpower, overcome yourself, learn to self-control!


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