Drawdowns are among the most difficult things for futures traders to cope with. In fact, they are the primary reason that many traders quit trading. The reasons for this are usually psychological and must be understood if traders expect to be able to continue trading successfully over the long term. Drawdown is simply the amount of loss between equity peaks over a set period of time. I’ve heard, though I don’t remember where, that drawdowns are like exhaling – necessary and natural. One cannot go on inhaling indefinitely, the ups must be punctuated by downs, though ideally of a lesser magnitude.
It’s an all too common occurrence. A trader has used his trade selection process to pick a seemingly profitable futures contract. Using his favorite analysis methods and indicators he has narrowed his search from a group of possibilities to a worthy candidate. A trading plan has been developed, specifying entry and exit points along with profit and loss objectives. All seems ready to go. Then, he begins reading the daily market reports and trading recommendations regarding his chosen commodity that have been written by supposed experts. Many of them make predictions that are very different from his own. The trader now begins to second guess himself and vacillation sets in. What is he to do? How can he take a position that is opposite from what the experts recommend?
