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

5.1. CASE STUDY ON THE EMOTION OF DRAWDOWNS

The following dialogue with Nathan illustrates how one portfolio manager has learned to understand the balance between emotions and risk management and to take an offensive approach to profitability. Here, he demonstrates how an experienced PM can weather a market downturn and major drawdown. He shares the lessons he has learned on how to deal with cautiousness and how to develop confidence from his process as well as the struggles of other emotional underpinnings in his overall strategy.

Nathan:

We last spoke when I was through my stop levels and the market and positions forced me to take something off the table.

Kiev:

Giving up potential opportunities?

N:

It was necessary. I had to be responsible for my positions as we discussed last time; sometimes the market can stay irrational longer than you can stay solvent.

K:

The psychological tension of managing a portfolio?

N:

Correct.

K:

Did you get back in?

N:

I just reduced risk. What I had remaining in those positions made money back, and I was adding to other types of trades with the theme that if that was the bottom, then there was recovery to be had. I probably made back fifty percent of my losses, and where I am right now there is breathing room to be offensive and have an opinion on where the market is going. I am reestablishing some of those views.

K:

What has to take place for that transition to occur, where you go from being defensive to being offensive? How do you know?

N: