Recovering From A $100k Trading Loss: 8 Action Steps To Get Out Of Drawdown

Turning Losses Into Lessons

In August 2022, I lost $100k in just a few days. It was the biggest drawdown of my career and I felt sick to my core.

I made a series of errors where I continued to short stocks in a very strong market. I didn't heed the price action and I lost all discipline by not taking stops. Events quickly spiralled and I felt totally out of control.

The experience forced me to stop, reevaluate trading, and build an action plan to get out of the serious predicament.

I share this story because I find myself in a drawdown once more after some good months. Fortunately, this episode is not as savage BUT one of the biggest lessons from the prior experience was to build safeguards to prevent future events from spiraling. That threshold has been triggered. The market in Australia has changed and the job is to adapt.

Through my action steps, I was able to dig my way out of that hole within 2 months. Here is what I learned and some points I need to re-emphasize once more to get out of this new drawdown. This may resonate with others in a similar circumstance.

#1. The best way out of a hole is to stop digging!

This statement is cliché but true. Let the P/L loss stare you in the face.

If you don’t confront the reality of the situation, then you will make matters worse. The inevitable consequences of avoiding the truth are emotional tilt, overtrading, and more losses.

The goal is to stay in the seat. Don’t jeopardise that.

A starting point must be to cut back daily risk limits or shut down trading completely until clear-headed. Get the book flat. Fight the strong internal emotion to “bet bigger and make it back”. Instead, get away from the desk, go for a walk, hit the gym, or do whatever it takes to fully reset. I like to vent through writing which helps to get it all out there. Sell orders also help.

It will take time and space for the trauma of events to fully heal. It is only then can we begin the process of review and reflection.

#2. Review trading until you know the source of underperformance

By studying the sources of underperformance and the inevitable mistakes, you can regain control once more.

This is often a painful experience but a necessary one. When the market is closed and there is no money on the line, the problem patterns become all too apparent. Study the data. Ask key questions about the underlying strategy. It may just be the normal course of business and the inherent variance in a probabilistic arena. More likely, the real problem is:

1) Not having an edge resulting in randomness

2) Not adapting to changed market conditions

3) Psychological

For me, back in 2022, the underperformance was due to:

• Short trades in high short base stocks in a strongly rising market e.g. LKE, LTR, and ZIP. This was a mean-reversion playbook but a risky one. I got blown out of the water.

• Not taking stops in full when wrong. This was a psychological shortcoming and a refusal to accept being wrong.

• Holding losing positions overnight in "hope" they would come back. Enough said.

Once identified, I built simple rules to address these issues. These included new intraday risk limits per stock; creating auto-stop losses to cut positions in full; implementing a systematic overnight risk management process; updating stats on long vs short trades for said playbook; and cutting back shorts in uptrending stocks. This helped me adapt to the market regime. It is not necessarily what the textbook would say, but it gave me mental clarity.

Currently, the underperformance is almost entirely attributable to weakening momentum and holding longer-term fundamental positions in the junior Resources sector. This is a new area I have been building into with multiple variables but the reality is 1) They need a good market and 2) I do not know what I am doing. There is just so much you cannot control with longer timeframes, which is why I try to stay in my day-trading lane within reason. Current themes are breaking down whether it is Lithium, Rare Earth, Manganese, Copper, or Gold. There has been a flood of capital raises that need to be digested. Just as all boats lift with the tide, these correlated themes all come crashing down together.

The solution here is simple. Cut and get back to the niche.

#3. Focus on easy money playbooks

Do not compound the hole, but instead hit easy singles.

The goal is to just get green once more and build a positive feedback loop. This means reverting to the highest probability setups and being comfortable passing on trades. After such a distressing event, I just want to internalise the feeling that "I can do this".

As a wise man once said, just make “One Good Trade”.

Solutions:

• Reduce timeframe and exposure in the market. Stop trying to go for home runs;

• Increase trade selection criteria and patience;

• Only trade stocks with meaningful RVOL;

• Focus on strengths and easy money playbooks e.g. “Morning Drive” and “Breaking News”. I want to join stocks in play going WITH the market on a strong catalyst that fits my criteria. I want multiple edge checks via “ASIA”.

• Stop trading patterns that are not working. Currently, this is shorting big gaps down on news Day 1 e.g. BAP, GNC, SIG, BPT etc.

The patterns may be changing in the short term but the fat pitch always comes. The key is going through the process, increasing vigilance, being fully self-aware, and waiting for that moment.

#4. Avoid high variance, weaker trades

This reinforces the previous point. Keep it simple and avoid the more volatile hands that need a good market.

Forget about playbook growth, put a hold on tech improvements, and filter out what other traders are doing. Instead, the sole job each day is to obsessively find and hit the easiest singles. All the review work should be on the easiest money out there.

Examples:

• Cut ALL mean-reversion or fading strategies;

• Cut ALL overnights;

• Stop buying stocks making news lows;

• Avoid the open in stocks with large gaps;

• Review the easiest trades at the end of the day.

In this current market, momentum has deteriorated and there are breakout failures everywhere e.g. NEU, XRO, and WEB. Furthermore, money seems to be trapped in corporate activity that has gone bad e.g. ADT, A1M, BRE, JMS, and PMT to name but a few.

Step aside and stay in your lane.

#5. Double down on best practices

Create the best environment to bring out the best self.

Trading is a performance domain. Identify the specific habits and routines that elicit freshness, focus, and mental preparedness which are the key traits needed to execute effectively. Double down on these.

The positive feedback loop is generated by putting in the work.

For me, the areas I want to focus on include:

• Proper sleep;

• Hitting the gym to gain energy;

• Pre-open preparation, planning and visualisation;

• Writing and check-ins throughout the day to increase self-awareness;

• Report card and trade reviews.

The universe has a funny habit of throwing up the next big opportunity if you are consistent, prepared, and bring the effort.

#6. Focus on the process

Accept that P/L is a lagging measure of new adaptions.

I realised I wasn't going to get out of the hole overnight. I embraced the struggle. I accepted the learning lessons. This is part of the job and it is character building in the never-ending journey that is trading.

Everyone’s process will look different.

Some key levers:

• Preparation and filtering to the strategy;

• Order entry and trade planning;

• Review work via report card and trade write-ups;

• Updating stats and tags;

• Completion of daily checks and routines;

Invariably, the month is always made from just one or two choice trades. Embrace the process and develop patience to wait for the fat pitch.

#7. Develop safeguards to prevent setbacks in the future

There is always a learning opportunity in the pain.

The next step is to fully internalise the lessons. How could I have adapted sooner and prevented the snowball? What rules can I put in place to limit drawdowns? You paid the tuition, so make sure you get the lessons.

For me, these were:

• End-of-day risk management routine to assess the suitability of overnights and hedge;

• Stop loss automation via new technology;

• Creating a new intraday stop-out plan with risk team;

• Setting new risk limits when in drawdown;

• Refining mean-reversion short playbook to better filter candidates.

The recent drawdown has revealed that I need a better playbook for swing and longer-term position trades. News often creates liquidity events. Correlation is high. There are multiple nuances and warning signs across the sector that need to be regularly updated. Ultimately, it is all about the cycle.

#8. Most drawdowns come from one thing- COMPLACENCY!

Overconfidence leads to missing biases and an increased risk of stepping outside of your lane.

When traders don’t do the work, the P/L will eventually follow. Ironically, it is when you are on a good stretch that you drop the very habits that led to outperformance. Then underperformance ensues!

Another sign of complacency is not adapting to a changing market. This is what I am experiencing right now. It may be short-lived into the end of the financial year. It may be a bigger-picture structural change. My job is to adapt and make the equity curve go up from the bottom left to the top right.

A motto from my mentor Lance:

“Never let your guard down as a trader- cherish the good times as there are bad days ahead. Push through the bad times, there are better days ahead”.

Ultimately, trust the process and remember you are playing the long game. I have been here multiple times before. KEY is stopping the rut sooner rather than later. Markets will always throw up opportunities and go through regime shifts. You just have to be in the seat to take advantage.

Conclusion:

Drawdowns are never comfortable. They creep up on you when least suspecting.

The magnitude will differ, but the underlying feelings of frustration, fear, and doubt are the same for all traders.

They may result from the variance of edge in a probabilistic game. They may result from a lack of edge. The reality probably lies somewhere in the middle.

The solution is to accept the truth of the new situation and make an action plan. Hopefully, some of the steps highlighted are a starting point to improve resilience and transition from setback into comeback.

Thanks for reading as ever.

Austin

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