A couple of ideas to set your/my mind at ease during a Drawdown….

During a Drawdown period, I like to look at a historical backtest report and see when a deep Drawdown/steep negative month occurred and then see what the following months looked like…. typically they are positive and offer comfort knowing that the system will recover. I also like to look at the MAX Wait days graph in the backtest report to give me a ‘feel’ for how long on average I have to wait for new equity highs etc.

If a momentum based system i.e. Rotational or Trend Following system takes a hit/slap in the face, I tell myself this pullback in my Momentum systems/market conditions in general, may potentially offer up some good Mean Reversion trades/setups…..for my Mean Reversion systems (or other traders who like to BTFD) to take advantage of.

I tend to think of a graph with a moving average or linear trend line moving up and just recognize it’s normal and expected for the daily returns to bounce above and below the trendline. Learning from Nick’s commentary and teaching, I also compare the returns against the expected daily/monthly returns as check that the system is within normal expected ranges. When all this checks out, it’s back to placing the next 1000 trades.