Managing Drawdowns
Quick Tip: Measure them, plan for them, and reduce size when they last longer than average.
Every trader, professional or retail, experiences drawdowns, the period of more losing than winning trades sending your equity curve trending lower.
Don’t be surprised, they’re as normal as changes in volatility and trend on your price charts (although not as frequent!). Yet most traders treat drawdowns like personal failure rather than what they truly are: a common occurrence in a probabilistic business.
The best traders I know don’t fear drawdowns, they respect them. That respect keeps them in the game long after traders with bigger egos and weaker discipline get washed out.
What hurts the inexperienced trader is what they’re likely to do next…
- Doubling size to “make it back fast”
- Abandoning what works
- Overtrading
- Revenge trading
- Predicting instead of following valid signals.
These reactions stack emotional risk on top of financial risk. A drawdown shouldn’t break your account. If you’re experiencing an uncomfortable losing period, it’s likely a sign that you’re trading with too much risk overall.
Think of drawdowns the way a pilot thinks of turbulence—uncomfortable but expected.
Drawdowns teach you:
- Where your system bends
- Where your psychology breaks
- How resilient your plan truly is
- How appropriate your position size has been
- How well you can stay disciplined without immediate rewards
They expose weak points before those weak points become catastrophic. That’s actually valuable information.
Measure Your Drawdowns: Data Reduces Emotional Reaction
You cannot manage a drawdown if you don’t measure it. You should keep track of your trading performance (specific to each strategy). In that data you can plot the average drawdown, maximum historical drawdown, frequency of drawdowns, and duration of drawdowns.
When you know these numbers, nothing should surprise you. You stop personalizing normal statistical behavior. You stay grounded, not emotional.
Plan for Drawdowns: Expect the Rough Patches
A professional trader plans for drawdowns the same way a sailor plans for storms.
Ask yourself:
- How many consecutive losing trades can I handle?
- How will I respond when performance dips?
- What is my protocol for a drawdown that exceeds the norm?
When the plan is written, don’t improvise under pressure. Reduce size when they approach historical average and certainly when they stretch longer than average. Not forever—just until rhythm returns. Smaller size protects capital, confidence and decision quality. This is a hallmark of professional risk management.
Unfortunately, many traders do the opposite, they increase size because they feel behind OR they drop the strategy and start hunting for the non-existent silver bullets. Bad ideas.
To your trading success,
Mike Siewruk
PS: Was this advice helpful? Feel free to pass this link for a free membership to Trade Aptitude along to your trading buddies: thedailymarketforecast.com/signup