In this post I will try to explain how you can handle a drawdown and losing periods in your account like a boss.

This is a continuation on a post I made a month ago: My thoughts and trading strategy for US stocks, bonds, precious metals and other commodities

That was a prediction I made about a month ago and this post is about how that prediction fared and lessons learned along the way. I suggested going long US stocks, shorting the US 30 yr bond and going long precious metals, mining stocks and other commodities (except cocoa and rough rice which I suggested going short)

Now making a prediction and how you actually trade it are two entirely different things so below I will provide a Mark-to-Market Performance summary of my actual trades in the period from October 05, 2015- November 06, 2015. (only futures are shown because they’re by far the biggest segment of my portfolio. The equity part of my portfolio was up 4202.83$ for the same period)

(click on image to enlarge)

Your job as a trader

This image presents a microcosm of what trading looks like. On the majority of your positions you’re flat to negative but there are a few positions which pay for your mistakes and then some (like the short US 30yr treasury bond future in this example).

When I made this prediction my total account equity stood at 217,000$ then as I predicted in the post My thoughts and trading strategy for US stocks, bonds, precious metals and other commodities it went north of 250,000$ in a very short period of time. My peak account equity was around 280,000$ but then, as the title suggests I had a drawdown (around 20%) and I am currently at 223,000$. A 20% drawdown is pretty significant so let’s see if that’s a result of an unfavorable sequence of results of random probability theory or I made a mistake somewhere. Fortunately the mistake is easy to find in this case, you can see it in the table denoted “Dumb trades”. Hadn’t I made those trades my account equity would be at around 245,000$-250,000$ which is a more normal and reasonable drawdown of around  10%-12.5%. You can see those trades more clearly in the picture below:

(click on image to see trades)

dumb trades


Now there’s absolutely no technical or any other reason I should have taken all those trades, it was just dumb. So what made me do them? Ironically the very thing I was trying to minimize. I have a pretty large short position in bonds and I took a short position in E-mini futures to offset a potential fall in rates (rise in the price of the 30yr bond futures contract) Since the short bond position is the largest single position in my portfolio (about 1,280,000$) a rise in price of the ZB futures contract would have resulted in a pretty large drawdown. Now don’t get me wrong I knew that you can’t expect to hedge something with some other contract and I knew from the various experienced traders the mantra: Focus on managing your trades, forget about drawdowns and the short term outcomes and focus on your method and the long term. During this experience of watching my equity curve going from 280,000$ to 220,000$ I finally internalized what those old experienced traders were saying.

Not a single one of those trades were taken for a valid technical reason, (except perhaps for the first one after which i should have known that I was wrong and stop) they were taken out of fear of a large drawdown. Ironically the very fear of something tends to manifest itself in the very thing you’re afraid of. So what is the solution? It’s simple, don’t think about drawdowns don’t care about them, just be sure that you are taking trades which make sense for technical reasons, have a good risk reward ratio, make sure that you’re not over-betting and drawdowns and everything else will take care of themselves. Now my solution is just a reformulation, a rewording of the same mantra the experienced traders have been saying all along, the difference is that this time I got the lesson with my own skin in the game. So I encourage you to make as many mistakes as possible (in a controlled manner without overbetting) and the “right thing” to do will come to you eventually.

In an analogous way, a thing that I already internalized is when you finally hit that potential home run trade (short the US long bond in my case) do not close it out before it reaches your profit potential. For example now I have a profit of 50,000$ on that trade and in the worst case scenario I could go from 220,000$ to 170,000$ if that trade turns around. If you think that way and you do your decisions out of fear you will never succeed. One needs to take a certain leap of faith to succeed. How do you get the confidence to do that? Experience, years of experience and thousands of trades under your belt and many, many mistakes. After a certain period of time you become good, there’s no way to tell if that will come after 6 months or 6 years but when it comes you know it and you feel it, you become confident and confidence is competence. You stop being afraid (not completely, you’re always gonna have a little fear because markets are uncertain but you stop doubting your method because of the overwhelming evidence through the years that it works).

In this specific case of bonds that would mean that I don’t cover my position until bonds are at the 100-110 level (with possible partial profits taken around the 120 level). That could take months or years but to be successful in this business you’ve got to have a lot of patience.

I am doing this open diary-style blog to improve my trading and help myself foremost but since I am not a special snowflake I am sure many of you can get something out of my writing. If you have reached similar conclusions on your path or maybe you handle things in an entirely different way I would be interested in your point of view. If you have any thoughts or opinions on anything I wrote just comment below.


P.S. After I finished writing the post I remembered an important point I forgot to talk about. It is valid both in trading and in life in general. It is obvious but it has taken me a long time to get this one. I made a mistake and it cost me 25,000$ (about 10% of my equity). The important thing to point out here is that this mistake is done, it’s history and it can never be changed. I cannot go back in time and undo it, you can only live you’re life from this point forward. I have only 2 options: accept it or try to make up for it right now and make it worse. Just accept it, don’t be stubborn like I was and it will save you a lot of time and money.

This is not investment advice and you are solely responsible for your actions.

For a full list of instruments traded in the lifetime of the portfolio and for performance go to the Performance section.