With Brexit fears sending stocks reeling, and Volatility VIX, -6.07% spiked to levels not seen in five years, those navigating the trading pits over the past two weeks are wondering what to do.
In his article on MarketWatch “5 Keys to a Trader’s Survival, in One Handwritten Note,” Steve Burns, a longtime trader and author who runs a blog to “help new traders survive,” took the recent turbulence as an opportunity to share timely reminder of rules traders should be following.
Inspired by this quote from legendary investor Paul Tudor Jones: “Where you want to be is always in control, never wishing, always trading, and always, first and foremost, protecting your ass,” he offered his own set of detailed rules for the brutal market days.
Here are his “7 steps for surviving a Drawdown”:
- When losing in trade after trade, lower your trading size by 50%. Trade smaller until a winning streak begins. Go even smaller if needed or even take a break from trading.
- Only risk 1% of your capital per trade. While this is standard, you must avoid the temptation to trade big to make up your losses. This usually compounds the problem because the market is not cooperative with your style during a down trend.
- Stay disciplined with your entries and exits. Do not get sloppy.
- Do not abandon your method, you have to stay the course so when your method comes back in favor you will start winning again.
- Do not take losses personally. It is not your fault that the market is not conducive to profits if you are trading your proven system.
- Do not fall into the temptation to let losers run. Cut your losses at predetermined stops regardless of the pain.
- Do not stop tracking your watch list for the markets you trade, be ready to take the right entry when it presents itself. Many traders get so beat up on a string of losses that they stop focusing on their watch list and stop taking high probability entries. You have to be ready to jump back on the boat when it is ready to sail again, just don’t drown while your waiting on the shore.
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