The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success

5.6. CASE STUDY ON SELF-ASSESSING DURING DRAWDOWNS

In the summer of 2007, many traders began to create doomsday scenarios in their minds or listen too assiduously to the Cassandras of doom who populated the airways. As the drawdown continued, the sense that it would never end kept coloring the interpretation of events. I spoke with Terrance about how he handled the drawdowns that came in the fall of 2007. I also explored ways in which he and his investment team managed changes in their portfolio.

Terrance:

First of all, risk management happens before you enter the crisis. By the time you are in the middle of the crisis, you are messed up. So, it's always the right thing to do to take a fraction and consider it. Let's not worry about what we thought before; let's just worry about what we think right now. Let's not worry about whether we are up three or down three or whether we are having a good year or a bad year; let's just look without bias, without hope, without emotion. Let's just refresh everything we know. Let's really look at the merchandise and think, "Will we have this exact same position size today?"

The definition of insanity is doing the same thing over and over again expecting it to come out differently.

Kiev:

I think Einstein said that.

T:

You go through contingency plans, but there are two types of emergencies—ones you have drilled on and ones you haven't drilled on. We have done this drill before. This was one where there is a fire in a building; you know what ...