All successful traders have trading plans for both good trading times and the negative periods. Negative trading periods are known as drawdowns. I wonder how the term came about, but one can guess that these periods are called drawdowns because they not only reduce our accounts, but that they also draw us down emotionally.
So how can we handle “draw us down” periods? In my humble opinion, the best way to handle drawdown periods is through confidence, faith, and disciplined money management. Confidence and faith are interrelated. Confidence increases over time. The longer we successfully trade our models, the more confident we become. Prior drawdown periods and negative emotional experiences also can help us better manage and understand current drawdown periods. “What doesn’t kill us makes us stronger” and “diamonds are made under pressure,” are two sayings I like to think about when I am in drawdown periods.
Ms. Rosabeth Moss Kanter, a Harvard Business School professor, was asked about what confidence is in an interview. Her response was, “confidence is a situational expectation—an expectation of a positive outcome.” This is relevant to traders who use trading systems and models. Every time we trade we have a situation where we should have an expectation of a positive outcome. Our trading models should have positive expectation. Positive expectation can be calculated from our trading research. But positive expectation cannot, however, be calculated in our emotional states. This comes from faith; faith in our selves, faith in our trading models, and faith from above.