The Daily Market Forecast... Working a Drawdown

Wednesday’s Results: The short @ 3970 stopped out, the breakout from there as well. 

Quick Tip: Working a Drawdown

All trading strategies have drawdowns (a protracted losing streak). The challenge is trading through it. You can’t stop thinking that it may “never come back” or churn for an extended period. Then you get FOMO and think if you stop now it will roar back and you’ll miss the gain. Obviously, these thoughts are destructive. Don’t go there. 

What you should do is have drawdown management rules to follow. These are rules that tell you when to stop trading the strategy and when, if ever, to start up again. This will take the emotion out of the process. Apply these rules to the performance of individual strategies, not your whole trading account. 

Here’s an example of a rule set: 

1. Track the equity curve of the strategy (this can also be generated from a back-test). 

2. Measure the drawdowns and select the longest you can tolerate. 

3. The next time the equity drops that percentage, stop trading.

4. Go back and measure the distance to a new equity high, or some percentage of the move

5. Start the strategy once it repairs to that level. 

While nothing in this business is foolproof, this technique has some edge. You’ll miss some big down moves and the following up moves, but that’s breakeven and inefficient anyway. The big benefit comes when the strategy has stopped working and you weren’t still trading. 

Today’s Best S&P Turning Points:

Sell 4079.00 stop 4084.75. 

Buy 3924.75 stop 3919.25.

Trade Fearlessly,

Mike Siewruk

P.S. What’s more important in trading? Math or emotions? Learn how to change your unwanted behavior here.