Surviving a Drawdown

Sooner or later everyone will deal with a drawdown. What is a drawdown? This is when the markets correct and take your positions with it. Your positions decline in value and therefore your account declines in value. If you trade with a short-term time frame, or are very quick at taking profits and closing a trade, perhaps your drawdowns will be minimal. If you follow trends for several weeks, months or even longer, a drawdown is almost inevitable.

It can be very difficult to sit tight while the market takes away weeks or months of gains from you. This period of time is when my confidence gets truly hammered. I second guess everything I’ve done. Should I have sold everything in my portfolio? Perhaps I should have sold most everything. Maybe I should have sold only a few positions. Doing nothing can be a good option. Or should I be buying stocks as they get “less expensive”? Often I look at my trades and ask “Did I buy the wrong stocks?”

As you can see, this situation can be hard to deal with emotionally. All the uncertainty and questioning of oneself leads to no good. You feel as if you don’t know what you’re doing and that trading is not for you. This is a point where many may give up, sell out at the bottom and move on to something else in life.

Experience tells me to take some pain and uncertainty of the drawdown. Swallow hard and ride the wave. Nothing goes on forever. Markets do not rise forever, nor do they fall forever.

Not everyone will agree with this notion. Many exceptional traders would say sell and go to cash. After all you never know early in the pullback if this one is the big pullback. That too is good advice, and I generally fall somewhere in between. All losing positions get closed. All weak stocks that are “kind of holding up” get sold. Any stock that I do not have long term conviction in, even if showing a nice profit gets sold. But there are the few, the ones that my research and my belief tells me they will continue on long term uptrends stay (but even these will be sold if my ongoing research changes my analysis).

The important thing is that you realize drawdowns will happen. You may be paralyzed by fear. You may sell something too early. Your account value will go down. But in the end you simply have to survive and live to fight another day. Just don’t give up.