One of the most critical aspects of making money in trading is how to deal with drawdowns. Drawdowns are inevitable and usually cause a large emotional toll. In fact, the emotional toll may be so great that you stop trading. You will start to doubt your techniques and even yourself. Both are debilitating.
Obviously, you need to make sure that you are using profitable techniques. Hopefully, you have been trading this technique for awhile so that you can retain your confidence through the drawdown. Once you start to feel the pressure of a drawdown, go back and backtest your technique again to make sure that this drawdown is not representative of the long term performance. This act of backtesting will likely help to boost your confidence.
Your fear can also be reduced by reducing the size of your positions. Your fear will be sharply reduced if you cut your position by half or by 90%. But you will be trading and keeping to your schedule and rhythm.
You can also find out if your drawdown is of usual or unusual size by an extensive backtest and by examining your real trading.
Sometimes it is a good idea to simply take some time off and clear your mind. Other times, it is best to keep grinding through the drawdown. What feels right to you?
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