How to Handle Drawdowns: Incase the Strategy goes Against your Prediction.

Your strategy will inevitably go through a Drawdown. And there's nothing you can do about it to stop that. However, you can learn how to survive it!
Today I will give you actionable steps, that you can use for the next time the market hit your strategy and you feel that everything is going wrong.
Let's start with an idea of what a drawdown is, and why drawdowns happen.
There are an infinite amount of trading strategies and tools that people use to trade and take advantage of specific market conditions.
Some traders are better in trending markets, they trade breakouts. Other traders feel more comfortable in ranging markets, where they trade quick reversals on key levels.
The Math is simple here. Trending strategies will have a poor performance on ranging markets, while reversal strategies will have a poor performance on trending markets.
Detecting the beginning and end of trending cycles or ranging cycles, is blurry. So, if you agree with that, as I do, you can expect your strategy to start failing at some point. And that's the beginning of the drawdown. (This is true for the best traders in the world, as for the worst traders in the world. Nobody scape drawdowns, the quickest you accept this, the faster you can learn how to handle them properly)
So let's start by saying that drawdowns are situations where your strategy experiences a lasting decline in performance, even if you are doing everything perfectly. Drawdowns, happen because strategies are made to take advantage of specific anomalies that can be found in one part of the market cycle, and when that market cycle finishes, or changes, your strategies become less accurate.
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It's important that you become aware of the Psychological consequences of Draw Downs, so you can have a countermeasure for this. Let's take a look at the most common ones:
1) Decrease in confidence (constant negative thoughts about your system)
2) Fear of entering the next trade.
3) Thinking about changing things in your strategy (deviations from the original plan)
4) Thinking about modifying the risk you are using to cover losses quicker.
5) Ceasing your trading execution, and looking for a new strategy.
ALL THESE ITEMS, are the main situations you may start feeling when going through a drawdown. IF you are going through that, it's important that you understand that you are under a delicate emotional state, where your confidence is low, and you are prone to make more emotional decisions that 99% of the time, tend to increase the drawdown.
So the way we handle drawdowns is by having logical and systematic processes in place instead of emotional ones.
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Here you have actionable steps to handle drawdowns:
STEP 1: You handle drawdowns by getting ready before they happen, not when they are happening.
This is true for almost all disciplines, not only for trading. Airplanes have clear plans in case things start going wrong, instead of figuring out the problem at the moment, pilots go to the manual book, and use the template for this situation, plus the fact that they trained those situations several times in simulations.
So, if you want to understand what a drawdown situation looks like in your strategy, you MUST go into the past, and when I say this, I'm not saying making a 3 week backtest. You need to go as far as you can in the past, to find that exact moment where your strategy is not working as expected.
How many consecutive stop losses do I have? 3? 5? 15? 20?
How long does this period last until everything goes on track again? 1 month? 3 months? or a year?
These are the kind of answers you are trying to solve. When doing a backtest you are trying to understand two things. The first one is if your strategy has an edge. The second one is how hard you get hit when things go wrong!
STEP 2: Work your risk management around the stats of your system. Imagine we reach the following conclusion "I have a system, that executes 10 setups

per month" and the worst-case scenario I have found is 20 consecutive stop losses during 2 months. What I would personally assume is that 20 consecutive stop losses can be 30. So how much capital percentage should I risk on this system so I don't get knocked out if this TERRIBLE scenario happens.
The answer for me would be 1% per setup. Under the assumption of this unique scenario, I would be 30% down, which is something acceptable, compared to the drawdown of conventional investment vehicles like S&P500 where we observed those kinds of declines, in the last years. The main point here is that you need to adapt the risk you are using on the strategy, to the stats of it, and your risk tolerance.
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Let's recap the key aspects of this post.
1) Drawdowns are inevitable, your strategy will be hit by this scenario eventually.
2) Drawdowns cause an emotional disturbance and are the main reason why people make really bad decisions.
3) We handle drawdowns by getting ready in advance. Through backtest, we can understand the edge of our strategy and the worst-case scenarios.
4) We adapt the risk of our strategy, by considering a terrible scenario, like 30 consecutive losses.
This will not eliminate the feeling during this period, but it will bring you a work frame to make logical decisions based on data, instead of emotions. Implementing this type of thinking will make your strategy more robust, it will help you go through these situations, and most importantly it will protect you from making stupid things with a strategy that has an edge, and actually works!
Thanks for reading!

On the Gold Chart we see a downward channel. It is correction time for XAUUSD . Our short-term targets around 1900 and 1930 focus on the key levels and volumes. Buy when the Markets Breaks above the Middle channel. (Above 1850)

FOMO is a P&L Killer! At its core FOMO is a fear. The problem is not that we missed the trade, it’s that our brains perceive that missed trade as a threat to our future, our success, our reputation. When humans are afraid of something, or see a threat, it produces anxiety. This fear takes blood away from the part of the brain where higher level thinking takes place and sends it to the part that impulsive thinking lives. There WILL be poor decision making under the influence of anxiety. The key to solving this issue is to take the threat out of the situation.

Solutions:
Taking a break from the screen is healthy but it is not a long-term fix. Brett explains how to train in exposure therapy (His presentation explains this in greater depth.) Slow breathing and visualization are more adept at battling FOMO. If you can visualize a calming place or situation and pair it with that fear, daily practice and dedication will prevent blood flow to the impulse zone. Gradually, when FOMO comes around, you will experience feelings of safety. Combined with expanding your time of reference, understanding, and acknowledging FOMO will make those events look like potholes on a long highway.

Missing a trade is unfortunate, but will it end my career? No. Will buying at the top, and then being so irate that I add to a losing trade and forgo stop orders end my career? It might. Will I be thinking clearly on my next trade with a fresh mistake permeating my thoughts? No.

The best motivation to avoid FOMO is to develop emotional hate towards the negative consequences of it. In the fullness of time, the desire to avoid negative outcomes becomes self-reinforcing with repetition and therefore cements as an internal priority. This works across the board in other life scenarios as well.

Tapping into other motivations besides P&L is one that really hit home with me as well. Brett dives into the desire to learn and grow as a greater motivator than just P&L alone. This addition will create a dual purpose to each trade. You are diversifying your outcome! If you come away from a trade with a negative P&L, but with a positive learning experience, you are building your Learning Capital. With time under this premise, your Learning Capital will be indistinguishable from your monetary statement.

Instead of tying your value as a trader strictly to your P&L, tie your value to your consistency and risk management. The magnitude of your P&L is nothing without consistency. Risk management begets larger positions, lower drawdowns, and an overall better quality of work life.

A Day comes with myriad experiences. Create a diversified life with people and activities that fulfill you outside of trading and your trading will improve. Reminding yourself daily of this is important.


Tying all of this together is the practice of keeping a daily ABCD Journal.

A- Activating Event – What got you upset? - Missing the trade in this case.
B- Beliefs about the event – Little voice in your head – Why is this upsetting to you? “Other people are getting ahead of me, I’m not as good as they are”
C- Consequences from the event – How does negative thinking affect your subsequent trading? I’m so upset about missing the opportunity I go ahead and miss the next one!

Becoming proficient in ABC will allow you to recognize the triggering event in real time. You begin to identify the negative beliefs and become a pro at understanding the magnitude of the consequences. You can change the pattern of your behavior because the consequences are so front and center.

D- Disputation- You are talking back at that negative thinking. How would you talk to someone you care about who is in that situation? Mentoring a teammate that missed a big play involves constructively lifting them up and helping them learn from it with a comforting tone. You aren’t going to beat them up.

GOLD SETUP:
If price breaks the current support then we could see a drop to the 1840s however if the rejection at the current level is found we would ally to 1860s

🧩👉 FOUR SIMPLE STEPS TO MAKING YOUR ULTIMATE STRATEGY:

Introduction

How many times did you find a perfect strategy giving great results in backtest but wasn't working for LIVE trading?

This effect is due to "overfitting" your past signals giving great historical results in a past environment.
Overfitting means you're forcing the results to look great; hence not realistic; knowing the historical price action.

Unfortunately, new traders don't know how random financial markets could be.
Then, a backtest with very controlled and precised conditions is often irrelevant for real/live trading.

Building a trading system is like solving a puzzle.
We don't define the entries and exits separately - entries are defined relative to the exits and vice-versa.

Imagine a RubixCube where solving one face of the cube could mess up with the other faces of that cube.

📊👉Step 1 - Define your entries

Finding entries is the easiest step.
Most indicators on a big timeframes give great entries but poor exits.

I appreciate low timeframes a lot as it gives me a better control of my RISK.
Thinking that low timeframes require more reactivity is a myth...

If we use the standard values from our trading indicators - yes sure, we often enter/exit dozen of times before the real move happens - and when it happens we're too exhausted to trade it well.

This is weird that many traders use common indicators with their standard values regardless of the timeframe.

Think about using the MACD with the 12/26/9 or RSI with a 14 period for example.
Using indicators with low values doesn't work neither for manual or automated trading.

The new traders wreck themselves either via exhaustion (manual trading) or with paying too many fees (both manual and automated trading).

If your high timeframes trades get invalidated/stopped-out, the drawdown is painful - and you really feel the pain if you use a big position size or a too high leverage... (please don't).

What I'm going to say is going to shock a lot of our readers I know.

Entries don't matter by themselves.

If your exits are not well-thought, you're guaranteed to lose regardless of how great your entries are.

📊👉Step 2 - Define your exits

A strategy without exits (Stop-Loss for example), gives a win-rate by design of 100%.
This is the most-common mistake apprentice quant traders make: they think first about PROFIT when actually they must think about the RISK first.

How much you can lose is more important than how much you can win (by far).
If you don't think about your RISK first, I tell you what's going to happen

Maybe you would have predicted the correct directions, but the unrealized drawdown + trading fees + funding will get you bankrupt before the move.

Anyone else already experienced this?

Step 3 - Backtest

From here, you don't even need to use a backtest system.

What I do is setting my chart days/weeks before the current date and then scrolling-right from there until the current date.

The goal is visually checking a few crucial things (in that order exactly):

A) Are my entries early enough?
B) If stopped-out how much do I lose in average?
C) What's the average profit I can make per trade? per day? per week?

You probably noticed that I don't mind the statistical data like win-rate, profit-factor, etc - I don't mind them because they're not relevant.

A backtest with a high win-rate, high profit-factor, high EVERYTHING could still not perform well for LIVE trading if the system is "overfitted".

Let's dig-in quickly into those 3 steps.

A) Are my entries early enough?

There is nothing worse than entering too late - this is obvious because it increases your drawdown if any and reduces your potential profit.

B) If stopped-out how much do I lose in average?

The most important item of the list If your entries are late, we get now that your stops are painful for your capital and psychology.
Even early entries could have terrible exits - and you may still lose

I don't use a price/percentage level stop-loss.
This is too subjective and to speak frankly... not working.

There is a great chance to get filled because of slippage even if the candles never hit your stop-loss order level and then we .... cry and rage because we predicted the correct direction but not the correct potential drawdown.
I'm 100% convinced it happens too often (to be profitable) for all traders using those stop-losses.

I won't say it enough...

Use a hard-exit for your stop-loss - it could be an indicator or multiple indicators giving an opposite signal.
Of course, it should be based on candle close - not candle high/low to remove almost completely the slippage risk.

For the take-profits, that's exactly the same concept.

I don't use price/percentage levels but a combination of Simple Moving Average (s), Traditional Pivots and Fibonacci Pivots

C) What's the average profit I can make per trade? per day? per week?

The goal of any trader: making money and quitting their jobs... I know.
That's why we shall not forget about the average profit we can make per trade and per period (day, week, month, ...).

Here it's important to have written goals and stick to them.
Assuming I want to make 500 USD a day, then I build a system giving me in average 500 USD a day with the lowest risk possible.

Step 4 - Rinse and Repeat

Creating your strategy is a continuous process - not a one step and you're "done".

After the previous step, you may notice some irregularities, some errors, some disturbing elements.

If my entries are late, or exits are late/too big then I go back to the first step and repeat the whole process.

With some experience, building a successful model for the asset and timeframe you want to trade shall take you no more than a few hours.

This is quite fast by the way and you'll already be ahead of most traders out there.

Conclusion

Building your perfect strategy becomes easier with experience and after a lot of trials.
There is no shortcut for becoming rich - you have to put up the work and be/stay focused.

📈👉 If buyers can maintain the support of $ 1847, this support can increase the price of gold as a projectile to targets such as $ 1884 to 1901.

#Bullish

Any professional trader should monitor his daily routine.
Traders make a schedule, follow it and remove from life what is unproductive.
Beginners don't spend enough time making plans.
A typical trading day for beginners can consist of constant monitoring of price movement, even during lunch.
Today we will talk about how to make your trading day calm and productive.


1. Sleep
Sleep is still an important part of any person. Do not neglect sleep, because sooner or later the body will require rest, without which it is simply impossible to trade calmly and in a disciplined manner.

Needless to say, your attempts to trade, analyze the market and stick to your trading plan with a lack of sleep simply will not succeed. Perhaps the first and most important way to ensure a proper trading regime is to provide yourself with a good, full night's sleep for at least 7 hours a day.

• Do not drink coffee or other caffeinated beverages during the day. Try drinking herbal tea instead;

• Do not go to bed late thinking that you can sleep off the next day. Research proves that our body functions as productively as possible when we go to bed at sunset and wake up at dawn. This means that you need to go to bed early and wake up early;
• Create a proper sleeping environment. As a rule, this means that your bedroom should be cool (i.e. not too hot), dark and quiet.

2. Healthy breakfast
It has long been known that breakfast is the most important meal of the day.
After sleep, the body needs a boost of energy. Find time for a healthy breakfast every morning: take the necessary amount of protein, whole grains and some fruits.

As soon as you wake up, drink a huge glass of water. Most people don't do that. Drinking water saturates your body and also helps to control appetite between meals, and since your body mainly consists of water, it is necessary, first of all, to drink water rather than any other drink.

3. Physical exercises
Regular exercise is the main key to your motivation, attention and focus on everything in your life, including trading. Physical exercise gives us a good feeling physically and mentally, and this is very important for the development of proper trading habits and productivity.

Regular physical training will keep you focused at the highest level, it will also help you sleep soundly at night, which, as noted above, is an extremely important factor for the proper functioning of cognitive activity, which is obviously crucial for success in trading.

4. Hobbies and entertainment
You definitely don't want to turn into a trading hermit. You don't want to turn into a guy who sits in his underwear in front of the charts in the hope that his positions are moving in his favor, and allowing every victory or defeat to affect his happiness.

Trading is a way to potentially improve your life, but it doesn't have to be your life. To succeed in trading, you need to have outside interests so that you are distracted from excessive market analysis and so that you feel happy and confident.

If you still don't have any hobby, then find some. Even if your hobby is just spending time with your family, that's fine, just don't be the "guy" who sits in front of charts all day long, because, I assure you, it's not good for you and your trading.

5. Plan your day
Make sure that you plan the key levels of the chart during or at the beginning of the week. Take some notes about the trend, your trading advantage, potential trading signals that you see.
The easiest way to do the analysis is when the market is closed, so you will avoid the pressure caused by the price movement. Make a plan for the week and every day and follow it without paying attention to the noise.

The famous French microbiologist Louis Pasteur once said: "Chance favors a pre-prepared thought."

6. Practice your trading strategy
This may seem obvious, but if you haven't mastered your trading strategy yet, or if you don't have a trading strategy at all, you won't be able to develop a trading regime. Many traders start in the wrong direction because they don't really have a clear trading method yet, but, instead, they have a vinaigrette of different methods and trading "tips" that they read here and there, mixed everything into one pile, "thinking" that they got, thus, your trading strategy.

You need a trading strategy that you can learn and master and that makes sense and is simple.

7. Discipline and consistency
Discipline, routine and patience are things that people usually consider "boring" or uninteresting, but they should not be perceived in this way at all, especially with regard to trade. You have to understand and accept these things as the ones with which you make money in the market. After you review them in the light that "discipline and everyday life are beneficial and useful," they will take on a different meaning for you.

Remember - trading should not be some random event without a structure or a firm approach and without an underlying regime, and if that is the case, you will end up wasting all your money by giving it to the market. You need to develop your own trading program that would fit your schedule and your personality, and then stick to your trading regime, maintaining cold discipline so that you can see how it works in your favor over a long period of trading and that it brings you income.

Ahead of the May Consumer Price Index ( CPI ) report out of the US, the world’s oldest inflation hedge is consolidating in a tight range above rising trend line support.

Traders and economists are expecting inflation to come in at 8.3% y/y (+0.7% m/m), in-line with last month’s reading, and with a highly-anticipated FOMC meeting set for next Wednesday, gold in particular may be poised for a breakout.

The precious metal has spent nearly 3 weeks consolidating between $1830 and $1870 as investors await clarity on the outlook for inflation and implications for Fed policy. As many experienced traders know, volatility tends to be cyclical on all timeframes, meaning that periods of low volatility (like we’ve seen over the past couple of weeks) tend to be followed by period of higher volatility and strong price movements; many traders seek to capitalize on this tendency by trading breakouts from low-volatility ranges.

As it stands, gold still remains above an 8-month rising trend line , suggesting that the longer-

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