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How To Survive A Drawdown Phase In Trading

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How To Survive A Drawdown Phase In Trading

Every trader goes through a drawdown phase. In your entire trading career, if you haven’t gone through a Drawdown phase, you still have not experienced the one complete cycle of the market.

Since markets are under pressure nowadays, most traders are going through this tough phase. Hence, I thought to write the article on this topic to help you understand how to survive a drawdown in trading.

So, without any delay, let’s get to the topic.

• What is Drawdown?

Every trading system has a certain drawdown. Drawdown is a phase where your account equity curve falls by a certain percentage for a particular period of time. This percentage can vary from trader to trader as it depends upon various factors like your trading style, trading strategy, and trading system.

Drawdown can occur at any point in time. In the drawdown phase, you continuously lose money or most of the time, your stop losses get triggered out, and suddenly you start doubting your system. In most cases, traders change their systems when they are at the peak stage of their drawdown, and I think that is the worst thing anyone can ever do in trading.

So here are some of the pieces of advice that can help you to survive your drawdown.

Advice 1: Understand that drawdown is Unavoidable!

As I mentioned earlier, every system has a drawdown. So, it is impossible to avoid drawdown in your trading career. One has to understand that drawdowns are like pullbacks to your account equity curve and drawdown are there so that you can touch new highs.

So, if you are going through a drawdown phase, then it is important to know that it’s absolutely normal; there is no need to worry about it. One has to keep in mind that the market will take your test by putting you in different circumstances, and the successful trader is the one who can survive through those circumstances.

Advice 2: Cut Down Your position sizing!

This is the most practical approach to dealing with a drawdown. If you are in a drawdown and continuously losing money, then the first thing you can do is to take a risk-off approach by cutting down your position sizing and losing less money.

A trader should take a defensive approach during the drawdown rather than risking more money. Often, I have seen that when traders go through a drawdown phase, they risk more money to cover their previous losses, and they end up losing more money. So, it is always better to take less risk and gain confidence through small wins.

Advice 3: Take a break from trading.

Drawdowns drain your emotional energy. Immediately after a big drawdown, a trader should take some time off from markets and focus on other things like his hobbies and going out.

This instantly stops the account bleeding and gives you a sense of relief. Once you get a sufficient break, then you can come back and trade in small quantities and regain that confidence.

Advice 4: Avoid Revenge trading.

An urge to quickly recover your trading losses leads to revenge trading. Once you start revenge trading during a drawdown, then it is very hard for you to come out of that drawdown because now, you are not following your system.

So, the urge to do revenge trading can further increase your losses. Also, you may start taking unnecessary risks due to revenge trading, which will be very harmful to your account.

Advice 5: Focus on the right things and think of a long term game.

Everyone knows that trading is a long-term process, so it is always good to keep in mind a broader picture in a drawdown. You may book a loss in a week, or you may book a loss in the month, but if you are profitable on a year to year basis, then that loss doesn’t matter much.

So, to summarise this point, I would say lose less when the market is not giving your profits and win more when the market is giving you continuous winning trades.

So these are some of the pieces of advice that can be helpful for you, especially when you are in a drawdown phase. If you like this article, don’t forget to share us across all your social media handles. Happy Learning!

6 Comments

  1. Thanks
    I need to share this to friend if you could please give an option here to WhatsApp or mail this article

    1. Thank you, Sujan, glad that you find the blog helpful. We constantly try to bring helpful blogs for our traders and will continue doing so.

  2. Truly this is a phase which can not be avoided, this article will help every experienced trader and a new trader in market.

    thank you so much for making this blog.

    1. Thank you, Rahul, glad that you find the blog helpful. We constantly try to bring helpful blogs for our traders and will continue doing so.

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