Dealing with my biggest drawdown (trading)

Fuck it, I guess I should admit to it…

My last 8 trades in a row were either a break-even or a loss

Can you imagine that?

8…

It hurts to just mention it, my ego took a serious beating…

But wait, instead of running away from losses let’s dive into them

Let’s put some music on (I like Worakls) on and talk about them, since I can’t out run them

This made me (re)backtest my strategy for 2020

I had recently adjusted it based of new knowledge and new testing.

The refinement I just mentioned took place without me backtesting the new trading plan, instead I truly believed they were worthwhile tweaks and additions so I just blindly added them to my plan.

It made my trading more mechanical, fuck yeah, that’s what I’m about!

So I just went through all the backtesting and applied those refinements, this lead to this:


In 2020:

42 positions up from 33

A strike rate (including BE) of 42.86% and only 28.55% of winning instead of 66.65% (including BE) and 54.44% of winning

An average return of 0.33% it used to be 1.31%

A total return of 14% instead of 43%

Eh fuck. Why did I adjust my plan

What the FUCK happened?????

That’s a good question..

II tweaked my trading strategy based on what I thought, on a logical basis would work better than what I used to do. And since it was only slight refinements I didn’t dive deep enough in my backtesting to make sure it was good changes.

So that made me deal with a 28% strike rate (of winning trades) instead of 55% which was the result of my previous plan

I tried to improve my plan, but instead I made it a hell of a lot worse.

It hurts, I thought everything I had done was good, smart and the right choice, well, it may have been in past years, but in 2020 it wasn’t the case…

Anyway, that’s the story about how that losing strike happened.

Even with a 28% winning rate the probability of having 8 trades in a row that aren’t winners is of 7.22%

Which is actually quite high knowing how many trades we shall take over our life time.

Let’s do an exercise to know the probability of having trades going “bad”

It’ll be fun I swear! The most important part is to know the probability of your winning trades (only winning trades, don’t include your break-even in this strike rate for this exercise)

So what is the probability you’ve got?

P= __%

So for me, according to my older plan, that P is equal to 55%

Now let’s do a tiny winy bit of maths (I recommend using http://www.wolframalpha.com if you don’t love maths and don’t have a calculator next to you :D, that’s how I passed my maths exams at uni!)

To get the probability of having X losses OR breakeven in a row we’re going to do:

(1-P)^X

Eheh, never thought I’d be talking maths on my own blog, what happened to me…

So for me that is (1-0.55)^X

Let’s have a look at the probability of having 5 losses OR breakeven in a row

(1-0.55)^5=1.85%

Okay that’s already WAY MORE REASONABLE!!! So in that case, with my previous strike rate, the probability of having 5 losses in a row is only of 1.85%

Over a lifetime of trading you’ll definitely take more than 100 trades, well at least I will that’s for sure so the probability of having 5 losses in a row within the next 5 years is actually pretty high…

Okay so that’s good to know I guess? I mean I understand the maths behind the probability of having a drawdown, I didn’t fail Math 202 at uni Max… I know you did!! Is there anything else you can talk about?

ABSOLUTELY!!! Well maybe 🙂

Use a deck of cards to represent probabilities

Oooohhhhh, finally a useful idea Max you were kinda wasting my time up to now..

adityachinchure on IG took this photo

(I really should say, thank you so much for reading this far, it means the world to me <3)

Okay so now unto the exercise I started talking about..

So with my 55% winning rate how can I represent that?

Well I’ll be lazy and say that it represents half the deck of cards because it makes life easier

So every single black card within the deck is a winning trade that represents 50% of the cards

I also had 11% chance of my trade being breakeven

In that case I’ll take 6 cards and turn them to breakeven trades

The RED 1, 2, 3, will represent breakeven trades to represent around 10%

The RED 4, 5, 6, 7, 8, 9, 10, J, Q, K will represent losing trades (20) out of the 56 card deck to represent 35%

So I delt myself 5 cards (avoid dealing more than 5 cards since with cards the cards that are already present influence the probability of what’s coming afterwards when it’s not the case in trading)

Pretty cards eh

So here’s the result:

8R = L

2B = W

2R= BE

10R= L

3B= W

That’s perfectly normal distribution for me, I have no issue with it I wouldn’t be surprised if it happened in real live trading to me. Just another day at the office.

This morning before having the courage to write this blog post I did the same exercise, I had 7 red cards in a row (I delt myself 3 hands of 5) the probability of having a R card that is always (more or less) the same.

But that surprise this morning made me realize, even with a 55% winning rate, the possibility of having 7 losses or BE in a row was there and I saw it in the cards.

That kinda sucks I’ll admit, but there’s nothing we can do about it

So I’m going to be dealing myself cards every single day from now on to represent the probability of having a negative streak of trades.

That being said, I’m also going to revert back to my previous trading plan and ignore all the changes I had applied to it because well… Yep it ain’t working.

Thank you for reading this post, I hope it was helpful!!

10 common ways trader beat themselves

Knowing the issue will help, I hope.

Let’s face it, trading isn’t as easy as it appears to be while trading either demo or (especially) on Instagram if you follow any of those gurus or even ever posted a photo with #forex and heard about how Mr. X. just sends you signals and you can become a multi-millionaire following them starting with 50$.

But it’s possible, I mean yes it’s hard, but running a mile under 4 minutes is possible, more than 1,400 individuals have beaten it, but no-one had ever managed until one person did – and he didn’t have any super powers knowing that others have now managed (and beaten him).

I’m in no way comparing running a mile under four minutes to being a profitable trader, I think the run is a hell of a lot harder – and the numbers probably prove that.

BUT, in both cases it required a lot of training, visualization and time in order to achieve it. I think it’s rather similar

Roger Bannister is the one that did it first!

Anyways, here’s what I think are ten small challenges that traders are often faced with


1- No patience, they expect to be profitable from the get-go

We all dream to be able to pick up trading within a month, but that’s not really the truth, I mean you can learn quite a lot in a month, (highly recommend reading Scott H Young blog) but a to become a lawyer you’ll have to study for around five years? A doctor? Even more no?

I mean, the same goes with anything, you can’t expect to become a professional footballer by just playing for a month

Another example would be video games, I mean if you start playing League of Legends to playing professionally within a month? It’s possible, but good luck

(I already wrote about this, but during the first three years I lost money every single time… Yep… That happened)


2- Do not understand the true nature of variance

Trading is all about probabilities, I mean screw that, it’s not even exact probabilities, but yep, it’s all about applying your edge over and over again.

Variance is the technical term that we use to describe the routine ups and downs that are built into trading, poker and so many different “industries” in which there is a large amount of short term luck involved.

It’s important to remember that it’s possible to “run bad”, sometimes even if you only take high quality trades you can still take three, four, five losses in a row, you need to accept it.

We need to think like a casino, don’t focus on one day, instead focus on the bigger picture

Even if you have a 60% probability of getting a winning trade (so 40% chance of a loss) you can still take a loss – I mean there’s a 1% chance of taking 5 losses in a row if you have a 60% probability of success.

There’s not much you can do about it, it’s just probabilities. That’s why you shouldn’t focus on the short term, instead look at your results on a monthly (and even that) basis, even better look at them on a quarterly and yearly basis.

Trading is and always will be a long term game. That not only applies to Forex trading, or penny stocks or even equity trading, anything that is a question of probability will be a long term game.


3- Failing to maintain their risk profile the same

The issue with changing your risk profile is that it screws up the entire probability model – if on one trade you risk 1% and another one 4% but the probabilities of them happening is the exact same – can you please tell me why?

The only reason I see is because somewhere your confidence increased or you wanted to make more money without really considering it

That being said, if one type of trade you take has a 70% probability of playing out, and another one a 40% and you know those stats because you have taken those trades a hundred times or more then that’s fair.

I personally only risk 1% while trading because I believe my trading plan is profitable.


4- Don’t stick to their trading plan

If you have a strategy, stick to it.

Don’t change your type of trading and chase a shiny object all the bloody time.

Don’t try tweaking your strategy after a month and decide to follow a completely different way of trading every month, that just isn’t going to workout sadly – you will just get stuck in this negative environment and get stuck – never fully seeing the results you want.

(Sorry not writing much on this one, it’s pretty straight forward).

Okay, I don’t have my trading plan on a white board, but you get the idea (I want a white board for that reason tho – I think it’s amazing)

5- Over-thinking

Don’t get me wrong, thinking and making sure you take the right trades is bloody important – but there’s a point where it’s too much.

If it’s in your trading plan, take the trade, if it’s not don’t.

Make sure you are a trader during the week, not an analyst.

By that I mean, during the weekend it’s really important to forecast all potential scenarios and figuring shit out. Once the market is live tho, you must be willing to jump into trades if they are in your plan. Don’t hesitate, just pull the trigger.

Another issue can be learning too many strategies – don’t get me wrong, I love learning more about macro trading, trading news and all those cool different ways to trade the FX market, afterall it’s my passion, but make sure you stick to what works fo you and don’t try to mix up too many things, find your niche and work on it. Once you have an extremely solid foundation then you can start adding more confluence factors on top of it, but it’s important to keep it simple.

I love the “KISS” acronym, I think that’s key to trading too – keep it simple stupid (short).


6- Not enough capital

If you are planning on going full-time within a year that’s more than possible, people have done and people will keep doing it, but it also depends on how much capital you have and how much you need to maintain your life style

If you need 4k per month to maintain your current lifestyle, trading with a 20k account is probably not enough, you’d need to make 20% per month to achieve that monetary return and that’s without even including taxes.

But if you have 100k accessible to you – it becomes a lot easier – instead of having to make 20% you could just make 4% – which is still a lot tho…

If you have a lot more then it becomes easier yep

Be like Scrooge 🙂

So make sure you don’t have unrealistic expectations, you will need some capital in order to make it & on top of that will need to have money saved up on the side – you don’t want to feel the need to make money every month, and accept the fact that you will never make the exact same amount month to month, this isn’t a job.


7- Not being willing to spend the time in front of the charts to learn

You will have to sacrifice a certain amount of time, would it be a few hundreds or more you will have to there’s no choice.

If you’re reading this pretty obscure blog I’m sure you’ve already heard of the 10,000 hour idea to become a master at any craft – would that number be right or not, it’s for sure going to take time.

As much as I wish you could learn all about it by reading blogs and books it’s not really possible. You will definitely have to spend time back testing your strategy but also spend time learning in a live environment, it’s way different than paper trading, trust me on that.

On top of that, even once you are full-time you’ll need to actually be in front of the charts when there’s a trade.

The 4hour work week isn’t really a thing, you will have to be in front of the charts when a trade alert is triggered. But sadly, trade alerts don’t always happen exactly when you want. It’s important to realize that. A lot of people talk about taking trades while going to the bathroom while working – it’s never been to that point for me, I just have trading view open on my laptop but… It could be your reality


8- Not studying their past trades – both willing and losses

Best way to discover what you are good at and also missing out on is to review your own actions. It’s great to learn how someone else trades and getting their own perspective on how to do something, but in the tend trading is a lonely game, it’s all about you.

The only way to get to the next step is review what you do right and what you do wrong and work on improving those things.

Jared Tendler (he has a cool interview with Chat with Traders) has a great concept, the inchworm, I’m going to do a blog post about it in the future, but it’s mainly about this:

In life we are the average of what’s great and what’s shit about us. To improve you need to get your positive even further along that side of “greatness” but you also need to improve the lower end on that curve, things you suck at, because once again, you are the average of those great and “shitty” things.

Make sure you know what you are doing good, and what you suck at, that’s the only way to improve.

Airports are actually rather good for those sessions

9- Revenge trading

It feels good to take another trade after being tagged out – I swear – it gives you control on what’s happening instead of being incapable of controlling the market (I wish my trading account was big enough, SEC come to me (please don’t use this against me in a case).

But, taking a trade because you just got tagged out isn’t the best thing, make sure it’s a valid trade, heck, sometimes it’s worth taking another shot at a potential trade, but… as a rule of thumb, it’s not.

Understanding your emotions is key, acting on them less so, especially in trading, when it comes to relationships it can be useful, but not for trading.

Denise Shull is my go to when it comes to emotions and trading, highly recommend it. I think it’s called Market Mind Games – it’s basically Wendy Rhoades in Billions.

Denise Shull has a great series of videos with Real Vision


10- Not knowing when to disconnect from the charts

That’s one of my favorites, the reason most people get stuck into a bad spree is that they decide to micro-manage all their positions, jump on the 15 minutes then the 5minutes.

Not disconnecting from the charts will really make you want to trade more often, it will also make you want to micro-manage your positions, it’s really not going to be any good.

Go out, enjoy life, spend time with friends and family, learn how to do something new, enjoy it.

Enjoying beers during sunset seems like a rather good way to disconnect to me