Wednesday, September 29, 2010

Some tips on handling drawdowns - Kanter's Law - Emini system trading

I was recently reading some articles on and came across one which referred to Ms. Rosabeth Moss Kanter. Ms. Kanter is a professor at the Harvard Business School. Following the links in the article led me to this interview which I thought was interesting and I would like to share with you.

One of the things she is known for is her Kanter Law. This law states that, “everything can look like failure in the middle.” If you have been following our S&P500 emini trading system you will know that we are currently in a drawdown period. Drawdowns can feel like failure. The feelings they create are difficult to describe, but if you trade you should be able to immediately relate to these undesirable feelings. Nonetheless, Ms. Kanter’s law states that it is helpful to look at the situation as if you are in the middle of a process when things are not going well.

As a systematic trader, I find this perspective useful. By considering drawdowns as if I am in the middle of them, gives me perspective, and allows me to have confidence going forward. Being in the middle of a drawdown period is rough, but having the right emotional and financial tools gives one the confidence to manage it. Faith, confidence, and perspective are your emotional tools as a systematic trader. Disciplined money management is your financial tool to get through drawdown periods.

Drawdowns are similar to being in the middle of a process. As systematic traders, we must always be ready to face drawdowns and the feelings they create. Solid trading models, confidence, faith, and the Kanter Law can all help pull us through the middle of this process called drawdown.

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