Psychology of the Drawdown
Drawdowns hurt.
Let me rephrase that. As a trader, drawdowns are just a nasty part of the game we play. Any (and by any I mean any) strategy that takes directional positions in the market is going to sometimes get caught looking the wrong way. The veterans among us have learned to accept that.
As a guy who folks look to for market wisdom, drawdowns hurt.
YK was looking the wrong way during the market collapse of the last few days and has effectively wiped out the gains from last month and taken us back to break even for the last five weeks. We are now facing a choice that many of you reading this blog are facing at this very moment.
The rubber band that is the market is stretched extremely tight. There have been only 9 instances since 1950 when the S&P 500 has lost as much as this one over three consecutive losing sessions. Historically, with the exception of a very dark Monday in 1987, the market has usually responded with a strong technical bounce (stats below).
For those of us in long positions now the question becomes do we stand with historical probabilities and hold out for the bounce, or do we pull our heads into our shell and wait for fairer weather?
I can’t answer that question for anyone other than myself.
The only answer I can be sure of is to know why you’re doing what you’re doing. If you’ve done the research and drawn your conclusion, then come out swinging. If you’ve been paralyzed with fear and looking to the stars for answers, get the hell out of the way.
Me and my own portfolio? We’re playing the probabilities. And if things don’t work out in our favor, I’ll take comfort that we have the weapons in our arsenal to climb back out of our hole.
Be safe out there tomorrow.
Happy Trading,
ms
P.S. These are just the ramblings of a regular guy who’s been there before. For advice from a real trading psychologist, I recommend the far more coherent ramblings of Dr. Brett’s TraderFeed.
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Filed under: Random Stuff | 3 Comments
Some things can be programmed – others not. The others have had control recently. Looking back, the “dimmer” should have been (be) set to minimum.
Can we see 4-day drawdowns?