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The Psychology of Handling Large Drawdowns
5 days ago
Friday, August 14, 2009
Often times on our desk we discuss trading "appropriately" to the current market conditions. Given that it is mid August, Friday, and that volatility and market activity has been weak at best, it is important to truly consider what "appropriate" means.
Perhaps you are trading smaller size or making less decisions, or even only playing your "best" setups. The key is to have the ratio of activity during slower conditions to high level periods be in line and consistent with your long run trading plan.
For example, a few stats from our desk regarding the number of decisions/executions we are making as of 10:30 CST.
Average: 2.6
For example, a few stats from our desk regarding the number of decisions/executions we are making as of 10:30 CST.
Average: 2.6
Median: 2
Mode: 2
Low: 0
High: 6
These numbers in and of themselves do not have any real significance. The key is to compare them to periods of 5 star volatile trading. If you make 5 decisions during slow trading, you better be able to make 15+ during "crazy" trading. Then your numbers are put in perspective and your trading equation works. If you can not do this, then perhaps 5 decisions on a slow summer Friday is too many. Each trader has his/her own make up and must adjust accordingly.
During these slower periods, I am not only reacting to my trading in the moment, but thinking two and three steps ahead for the next opportunities the market presents.
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