Trend Following Drawdowns Happen, But They Are Part of Success

Every trader has drawdowns. Consider a chapter from my book, Trend Commandments:

In the early 1990s, Commodities Corporation (a famed trading incubator that taught and bankrolled new traders) invited a group of Japanese traders to its company for in-house training. One up-and-coming trader at Commodities Corporation took his new friends to lunch. He told his guests how important risk management was, and to risk only 1 percent per trade. He was clear that experiencing small losses were part of his process to ultimately finding big winners. The Japanese traders, with puzzled looks on their faces, asked, “You have losses?”

Ouch! Time for everyone regardless of country to learn about small losses, and to love them, even if that means your account will occasionally have drawdowns. What are drawdowns?

Drawdowns are those nonfun time periods where your small losses add up to reduce your account size. They happen. The key is to quickly and successfully recover from them by sticking with your trend trading system and waiting patiently for big trends to reappear, which let you get back to making new money again (and paying for all of those small losses).

How much can you lose? That’s an important question to answer, and it comes down to the risk you take (which will vary by your personal choice). However, trend following is much easier to believe in when you consider the length of professional trend trading track records, especially the really long track records that offer proof of viability. That said, some will spend a lifetime trying to avoid any loss even though its impossible.

Along those lines, recent feedback in:

Hi Michael, Greetings from San Diego! I am a fan of your podcasts and I am new to trend following. The most difficult thing for me to currently digest about trend following is the drawdown side of things. I have some expertise in technical analysis and since my stop is always pretty close to entry depending on my risk appetite and position size, drawdown does not seem to be an issue. But the technical analysis approach needs active managing, hence I am seriously thinking about TF systems. Also, I understand that systems have several other benefits as confirmed by several famous books and personalities including yourself. My question to you is where can I find some of the successful trend following strategies used by people and their corresponding outcomes including trades, drawdowns, profits, etc? And is there a resource you recommend where I can possibly back-test those strategies myself?


Review and email me back. Beyond my free world (and near free) of books and podcast, my Flagship product deals specifically with your issues.

Bottom line, drawdown is always an issue for everyone. It can’t be escaped.