Work harder, trade fewer in a long and excruciating trading drawdown

I write this as I am in my first trading drawdown of 2010.  As I said previously, I find that I am still ill-trained to respond to big drawdowns.  I caught myself over trading again hoping to rake in a few quick paper bucks in my demo account to get myself out.  However, the ability to maintain discipline and performance under stress is what separate the pros from newbies like me. I know what I must do at the back of my head but I took the easy way.  This trading drawdown is definitely bringing the worst trader in me.

As Dr. Steenbarger wrote in his post on Stress and Performance in Trading,

“… one reason stress might affect performance among traders is by skewing their assessments of risk and reward. Under pressure, traders may narrow their cognitive scope to only the information most salient to them (availability bias) or relevant to their expectations (confirmation bias); focus only on superficial qualities of observations (representativeness heuristic); or become more likely to take profits than losses (disposition effect). In other words, stress disrupts performance by altering normal, sound information processing.”

In addition to a narrowed mindset, the cause of my bad habit to over trade during a big drawdown is that I subconciously associate the need to recover my account balance with the need to trade.  Nothing will happen if you don’t trade, right?  Well, at least you won’t lose anymore than you have.  That would have been a good start.

So I considered to ease back on trading by focusing on my quant work.  Then I realized this is yet another misconception. I was merely walking away from my problem.  What I needed to do is to face it, not with mindless trading though.

During a stressful drawdown, work harder and think plenty about the market, not about recovering from your drawdown.  In the mean time, only trade your best strategy to reap the best probability of profits.

At the end of the day, nobody can dig yourself out of an account drawdown but you.  Something must have been wrong with your trading or your current perception of the market to get you in a drawdown.  Or, it could very well be just plain old bad luck.  In any case, take a step back from trading and use the opportunity to realign yourself with the market or wait for market conditions to sync back with you.

This is a forgotten lesson that I have wrote about in a previous drawdown.  I have since added an additional section in my trading rules to impose it upon myself with this re-ocurring problem.

I can never get rid of large drawdowns completely because they are a regular part of trading.  This particular one has been a great self-discovering experience. Ultimately, learning to cope with trading under stress is one of my top training priorities to achieve before moving on to trading a live account with real money.

Related posts:

1. First 2010 trading drawdown analysis on the verge of a new record
2. Barred from Trading at Work: A curse or a gift?
3. Focusing on trading my timeframe to reduce over-trading
4. ER2 market fewer noise
5. Closed EUR/CHF and GBP/CHF Shorts: Best. Trade. Ever.