Drawdown is likely to happen when there is no clear “standpoint” in trading.
Let me try to explain my standpoint on drawdown:
If you are a trader who is used to make his decisions based on candle, foot print or volume profile charts then it is more likely that the drawdown become larger. The reason – in my opinion is – that these traders don’t really see what the market makers are planning. This is because of the nature of these charting systems. Every line, indicator or candle is plotted on the chart AFTER the event happened.
Every common trading chart shows the past!
Since we can’t foreseen the future we are trying to extrapolate the plotted events on the chart into a possible or probable forecast and then place our trades on this believes. This becomes worse when you choose a data feed which doesn’t provide quality data.
As human beings we are not good at all in forecasting. We use several techniques to minimize our risk. One of them is our Stop handling. Trading stops and their usage is a philosophy for itself. Every trader has his own philosophy about stops, their usage and their meaning.
Why Order Book?
I am trying to spread the word that every trade – which always happens between 2 individuals – is kept in the Order Book. Order Book gives me the idea what is traded at which price at what level. There are other fine information Order Book gives me. Saying that, the order book is the direct place where “manipulation” can be seen in time. Not hindsight!
This “manipulations” can be expressed in words, like:
- Absorption
- Exhaustion
- Liquidity
- Sweeping
- Spoofing
- Pulling, Stacking
- Book Flipping
- And more ….
More than 99% of traders, I was one of them, don’t know that. For most of these traders, trading can be expressed like: “Gimme a signal, a line or an automatic trading system and I will trade!”
But exactly this Order Book techniques are the ones, which gives a serious and professional trader a clue what is happening every day in his chosen instrument. Of course, it takes time to learn and acquire this knowledge like everything we learn, but with time it becomes a “second nature” in our trading.
Today we are in the lucky position to have software platforms like Bookmap or Jigsaw trader which “translates” and visualizes this terminology or this behavior in time on the historical chart.
It happens in time in front of you.
The only task you must master to become a professional trader is to understand, what the market is telling you.
However, with this knowledge your Drawdown will stay low, because you see “support” and “resistances” in time, BEFORE the price touches those levels! You will use this knowledge to place your trades “before the trend becomes obvious”. Yes, it takes times to learn, but it pays off.
Emotional State
However, drawdown happen, at least from my experience, when I am not in the right mood to trade, when I am impatient, tired, pissed on, etc.
In one word:
My “physical” and “psychological” presence is not in the right state to trade, but I trade anyway. That was and is the reason for my losses. They have been very rare lately. In case of a bad day, I stop trading if my drawdown for the day is $600.
Minimize your Drawdown
My online course is about all this fine “terminology” – what it is, how it works and how to profit from it. Check it out.
READ ALSO this articles which are complementary to the post above:
Improve MAE and MFE with Bookmap™ Heatmap
Visualization in Trading