Lessons From A Penny Pro

How to Survive Drawdowns

It’s been a relatively slow day of trading but that’s part of the game. There are over 250 trading days in the year, we are bound to have boring and exciting…profitable and painful times during that period.

It’s all par for the course. And if you’re not comfortable with being wrong or taking a loss, then maybe you should park your money in a savings account… because there are no guarantees in trading.

Not only that, but you’re only as good as your last trade.

For example, I’m probably best known as being the guy who helps people grow their small trading accounts (under $25K). Last year, I took three separate accounts and returned 220%, 275%, and 600%


(I’ve figured out a way to cut your learning curve in half, if you’re ready to start receiving my alerts in real-time click here)

But you know what?

When I set out for my $2K challenge I got off to a bumpy start. You see, two weeks ago, that account dipped to under $1K. That’s right, a drawdown of 50%!!!

Now, if you recall, my goal is to take a small $2K trading account and build it up to $100K…

Most inexperienced traders would have panicked. They would have ditched their strategy and tried something different…OR… they would start trading bigger, trying to double down and get to break even on one trade…

However, none of that crossed my mind.

You see, as I teach my Profit Prism clients, we’re not rolling the dice here. In fact, we’re actually being strategic and playing high-probability trades.

A high-probability trade has a strong likelihood of being profitable. But no strategy or setup is 100%. That said, you have to be trade accordingly, so when you do suffer losses they aren’t large enough to take you out of the game.

(The market will challenge you, but my proven system is tried and true, if you want to follow my trades, here’s how to get started)

Now, one of the keys to my comeback is that I didn’t force trades to make up for losses. Instead, I focused on…

Surviving Drawdowns

One of my favorite quotes that applies not only to life, but also trading, “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot and missed. I’ve failed over and over again in my life. And that is why I succeed.” – Michael Jordan

You see, wins, draws, and losses… they’re all part of the game.

But how did Jordan become great even with all those losses? I bet you he had a plan and stuck to it.

It’s the same with trading… if you ever experience losses… don’t get caught up trying to trade just to make back your money. When you do that, you’re essentially trading on tilt… and what that means is you’re letting your emotions and profit and loss (PnL) dictate your trades.

Now, I get it… when you have a string of losses, it has a psychological toll. It happened to me recently with my $2K account challenge. At one point, I was down 50% of my account… but now it’s back above.

How was I able to make my losses back, and then some?

Sticking to the Plan and Reviewing

Well, the first thing I did was go back to my journal to review my trades. Now, I looked back to my trades and walked through them again… asking myself, “If I could do this trade over again, what would I do differently.” You see, I found out what I was doing right and what I was doing wrong.

If you’re not planning and journaling your trades… well, you should start to. For example, here’s how one of your trading plans can look like:

I notice the consolidation pattern in ATA Inc. (ATAI). Now, this is one of my favorite setups. We saw the stock have a strong move higher… followed by a drop… and now, the stock is holding at a key support level.

If you look at the daily chart on ATA Inc. (ATAI) above… you’ll notice a blue horizontal line. Well, that’s the support area. Basically, the stock had a hard time breaking below 90 cents.

With this pattern, I would like to buy it as close to the blue horizontal line as possible… but I’m okay with paying as high as $1.05. My stop is at 90 cents. My target is $1.35 to sell half of my position.

If you stuck to that plan… here’s what would’ve happened in the stock.

The point of a trade like this would be to get a base hit… and that means sticking to my setups – and not style drifting and trying new strategies just because I had a string of losses.

Now, it’s not just about trading… and making money… great traders review their trades and try to tweak their performance. What helps the most is keeping a trading journal. You could keep it simple with a trading journal, but it should include:

  • Date, total profit and loss (PnL), number of trades.
  • Symbol traded
  • Chart of the stock
  • The edge you had in the trade
  • Entry, exit, target, stop loss
  • Thesis
  • PnL for trade
  • If you could go back and re-do the trade, what would you do differently?

Keep in mind, your trading journal could be as detailed as you want.

Writing out a plan and journaling allows you to focus on the setups that have worked for you in the past. Those tools helped me hone in on just my chart patterns.

Moving on.

Let’s look at the key that got my account back in positive territory.

The Key to Surviving Drawdowns

The real key to surviving my recent downswing was to sit on my hands and be patient. The key here is to NOT force trades just to make up any losses… the key is to focus on a base hit… the next trade doesn’t have to make you or break you. For your trading psychology, just seeing a “realized gain” – no matter what size – will give you an edge.

Once you hit a trade – even a small winner – based on one of your setups, you have the confidence to build momentum. Ultimately, this is what helps create long winning streaks.

You see, I wasn’t really focused on making $1,000 – nailing a 100%+ winner – to get back into positive territory. All I focused on was nailing a 10-20% winner… followed by another… and another.

If you think about it, it’s a lot easier to hit 5 to 10 10-20% winners… than hit one 100%+ winner.

The whole idea here is to not swing for the fences when you’re in a downswing. All you really need to do is focus on hitting one trade… and that could lead to boosted confidence… which should lead to momentum and a string of winners.

On a last note, try to keep your life balanced. Trading is not everything, it’s just a way to achieve financial freedom, nothing more…nothing less. That said, I’ll be in and out this week, as I’m gearing up to take my family to Disney. I might post some pics on twitter, so follow me there if you aren’t already.

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