Draw-down: A decline in an investment or fund. Let’s assume you start your account with $1000 and you lose about $100, that is a 10% draw-down (which is acceptable in my books, because you can recover it back). Being disciplined is one of the major challenges that many traders are faced with, but it is a skill that can be learned, but only if you are willing to learn.
Self control is something that should come from within, no amount of motivation or support can work if you are not doing your part. Traders need to understand that no matter how great the strategy or trading method is, if the emotions are not well checked, you are heading for trouble and a disaster is imminent. This is a very sensitive subject and not many traders are keen to talk about it.
It happens a lot, especially when you are still starting out, even seasoned traders do experience a draw-down. It is something normal, but it becomes abnormal when you cannot even figure out why you got your account into such a state in the first place. It then becomes very difficult to improve, especially if you do not keep a trading journal or even have a trading plan.
You had a very bad week and your confidence went out of the window. You feel so down and stupid, so ashamed and embarrassed, like you are such a loser and you think you need a break, maybe you do or maybe you don’t. There is absolutely nothing wrong with taking a break, but what exactly does taking a break mean? Does it mean walking away from your account and neglecting it without trying to figure out what you could be doing wrong or what could be the biggest contributor to your draw-down?
Trading is more about you than about a trading strategy
Most of the time, failing has nothing to do with your strategy or method of trading that you use, but a lot more to do with your emotions and your behaviour. A group of traders who are trading the exact same strategy can have different outcomes. I see this even with my own mentees, the outcomes aren’t the same. When you have lost more than 50% of your account’s equity, it is definitely time for you to take that break, evaluate yourself and work on your issues (if you have a coach, a good coach can help you with tools to sort out your issues but you have to be willing to do the work needed)
The problem is when you do not have a trading journal and you do not record your daily trades and the reasons behind them, it is almost impossible to recover and you won’t know what you did wrong, and therefore you won’t know what to fix. So while you are still reading here, check if your trading journal is in order (that’s if you have one), if you don’t have one, get it today and start writing In it from Monday and while you are still at it, also draft your own trading plan. If all these are really confusing for you, it is time you find yourself a coach (I can be one)
When is it a good break?
A good break means that you are going back to your demo account, you are decreasing the amount of money you are trading with by asking your broker to do a “withdrawal” for you on your demo to accommodate your new smaller equity on your live account. Get your trading journal in order, start writing In it right away. Do that for about a week and at the end of the first week, go back to review your daily trading activities and see if there are any mistakes you can pick up. Chances are, you will pick up some mistakes because you’ll be doing it with a sober mind, minus the emotions you get when you are trading live. Start fixing your mistakes on your demo account and see if you can improve or do better, chances are, you will improve and become a better trader. Gradually move back to your live account to get your emotions in check again. Start with a very small volume until you feel confident again.
When is it a bad break?
A bad break is when you walk away from your live account and you do not touch your demo account or even try to figure out what could have gone wrong and why you are in that situation in the first place. When you take a break, it is a bad break if you do nothing during that break. If you do that, chances are, you will go beyond a simple draw-down when you finally go back and you’ll head straight to a margin call (losing your account), because you will still come back with the same emotions and behaviour.
If you should know, a demo account is there to retest and retest. A trader is never too smart for a demo account. I used to do that all the time and it worked. That is how a trader becomes emotionally stable day by day and that is how you become rational. I hope you found this post informative. Thank you for stopping by, kindly share with your friends and if you need private coaching, you can check my course HERE.