One really tough part about being a trader is dealing with the uncertainty. What will happen tomorrow? More of the same, or a turnaround? My current performance is a good example...
Two trading days ago, I was at a new equity high. Over 60% return for the year. Pretty good.
Now, I am looking at a 2 day drawdown of around 25%. Not so good.
If I knew tomorrow would bring a recovery, I'd probably not give it a second thought.
But, what if tomorrow is bad, just like the last 2 days? The thought of it is unsettling, to say the least. Watching profits vaporize is painful. Crowing about entering the top 5, and then falling out 2 days later, is downright embarassing, too!
At the end of the year, I won't even remember this particular day (except for the blog post). But right now, it is easy for this to be my focus.
Will I, and when will I, recover to a new equity high? The uncertainty of it all can be a killer.
Trading is emotionally gut wrenching. Don't let anyone tell you otherwise. It does get easier over time (10 years ago a 2 day, 25% drawdown would probably have me puking until I was doing dry heaves!), but the pain of losing (and joy of winning) is always there to some extent.
There are warnings that you may lose all or more than your amount invested when trading futures and forex.
ReplyDeleteHaving less than 50% drawdowns I think is the main key, because people want no part of you if you've ever endured 60+% and managed to make it back to new highs.
Naturally the drawdown is punishing, but most people look at the rear view mirror in hindsight, so don't do that.
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ReplyDeleteVictor Neiderhoffer and John Meriwether both had multiple blow ups of big funds, and people lined up to invest in their next venture.
ReplyDeleteI will agree that 50% is probably the maximum drawdown that most retail people can endure.
For most non-professionals, one rule of thumb that seems to be useful: Imagine the maximum drawdown you think you could endure, before you'd quit (exit position, liquidate the account, stop trading forever, whatever). Say it is 30%. Take half that, or 15%. Realistically, that is the point when you'd start to fall apart.
The reality is most people can only handle about half the pain that they think they actually can.