Reduce risk in a drawdown

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• 0:00Speaker 00

  Hey everybody, it's Michael Martin. Thanks for being here. So a good comment came in on how do you deal with sizing down when you're in a drawdown? And it was Gorilla Glue who made the comment. The original video is "The Benefit of Not Giving Negativity a Voice." And a couple of things. One is Gorilla writes and used the word "whilst." So I don't think you're from the US, but I'm just guessing. Look, when I'm going into a drawdown, the main thing in my life that I'm trying to avoid is bigger drawdown. So I have found when you hit critical spots, say like after 5%, depending on what your

• 0:41Speaker 00

  bet size is, I'm meaning 5% drawdown, you can benefit by cutting your position size. Since you asked, I'll tell you, like, it shouldn't be your concern to be positioned large to try to catch the bottom of the drawdown. The goal for me, and I think for all speculators, is to not lose. And that was really drilled into my head from anyone who coached or mentored me was minimize your drawdowns. And the goal for any trader really is to learn how to play superior defense. Now, you might have the emotional constitution, Gorilla, to just stay with, you know, stay

• 1:24Speaker 00

  with that, which works for you. My advice, though, for most people is until you get everything down and you know that you have several ways to make money, you have an A+ setup, an A setup, maybe a B setup, that you can rely on, if you don't have that type of confidence, it can really shake your confidence further when you start losing larger sums of cash. So, two, you have to remember, when I was starting out and I had client capital, I was trading 2% to 5% risk units, right? I had to. I couldn't be looking like, because the cost was so large, I couldn't be whipping around

• 2:09Speaker 00

  my money because the execution costs were 1%. So today's a very different day and age. But my focus would be, and still to this day is, to keep the drawdown small, keep the losses small, because then what I don't lose, I don't have to earn back. And then I don't also have that, it's more like, so that's like on a per-trade micro level. The macro level, the meta, maybe the meta way is a better way of saying it, is when you're walking around and you're in a 15% drawdown, you feel like crap. You know, you don't, you know, your self-esteem gets hit. So there's all of that too. So when I use smaller bet sizes, it's not just protecting the capital, it's preserving

• 2:53Speaker 00

  my mental capital that goes with all that. Because then it's like, okay, I can take a week off from the market and just observe and see, okay, what is it? Is it me? Or is the market not particularly amenable to my trading style for this week, for this period of time? And if I do that with a small drawdown, I'm not even tripping because it's gonna be, I'll be very quick to getting back to previous high-water mark, you know, on the, you know, on the old equity curve. So I think, yes, it's probably a very personal choice and a personal decision, but I would be sure to be mindful of that.

• 3:35Speaker 00

  It might benefit you to say like, again, I don't know what you consider a drawdown. To me, any drawdown is a pullback from a previous high. Usually what traders do is they think in terms of magnitude, right? And once, I think 10% is the real one that most people look at. I myself start thinking, you know, between 2% and 5%. You might, the key would get looking at it at 10% and then taking, not just cutting your position size, but also perhaps even taking a haircut on your capital. It wasn't uncommon to talk to other CTAs who, if they were in a 10% drawdown, they would start trading as if they had half their money.

• 4:18Speaker 00

  And the reason is, is because the drawdowns, they go geometrically against you. And then you put yourself in a real hole. You know, you don't want to be down 20%. If you're thinking of growing your money and trying to build a track record, almost everyone out there has a bad year or a bad stretch. And the goal is to avoid that so that you can avoid looking like everybody else. That's the way I would approach it if you're just starting out. Because you all know the math, right? If you're down 20%, you have to do 25% to come back. And that puts a lot of pressure on you, right?

• 4:58Speaker 00

  And I think Gorilla Glue is saying that he's shooting himself in the foot. So, you know, to me, it's like, if you trade too large through the drawdown, you could also be shooting yourself in the foot, right? So I always said, well, I'd rather trade smaller and have more of my capital in the account, and then figure out like, okay, maybe this setup that I'm using isn't gonna work for this week because there's something going on behind the scenes that I can't see. And I wouldn't worry about digging out, you know, there's nothing wrong with being in, because the question, I'm reading it here, "I don't want to end up shooting myself in

• 5:40Speaker 00

  the foot by being sized down when I start winning again." I don't care about this, right? I mean, that's, that's not my outlook at all. I don't care about when it comes back because I could always add to my winners once I see evidence that, you know, the market has turned back in my favor. You might be make it and take it. So again, that strategy works better for you. And I don't mind how long it takes, because if you're down, again, I'm kicking in these rules very, very quickly. Because I've learned the hard way over the years, just looking at people's faces.

• 6:18Speaker 00

  We're gonna talk about asset protection this week a lot, especially Friday's episode. You know, protecting capitalists, job one. Everyone wants to know, like, what are you doing? What is, what's a good ticker? What's in, what's in play? But to me, the bigger picture that most people are missing is the fact that you have to play superior defense. And you should have very regimented rules on what you're gonna do with your capital when you hit key inflection points to the downside. Especially if you're an active trader, because you don't want to wake up one day and find yourself down 20% in a tough market and, you know, you're trying to grind it back to break even because you have a mental attitude problem with being in a drawdown.

• 7:01Speaker 00

  Now you've become your own worst enemy, and in my opinion, all of this stuff could have been avoided if you had rules in place to avoid the bigger drawdowns in the first place. So that's kind of the stuff that I'd rather talk about here on the channel, rather than 10 opening range techniques for scalping on any given day. You can kind of go get that stuff elsewhere. My mindset is much more how to prepare yourself to win, and then when you do start winning, how do you maintain that without freaking out? Because you've come into all this financial abundance that you've never had, and it can be a little destabilizing at the beginning, right? You have to get used to it. Anyway, I appreciate everybody's comments. Thanks for being here.

• 7:46Speaker 00

  I'll see you tomorrow.