[The Trading Arc] Episode 27: Do we have enough oxygen tanks? Healing a wounded heart, and a "gradual rehabilitation" to dive back into the sea
Last time (the 26th session), we learned about the "6% Rule" that saves us from drawdowns by reducing our account during losing streaks. When the market and our wavelength don’t match, we should rest gracefully rather than get stubborn. That humility protects our funds, doesn’t it?
However, after taking a rest according to the rule and trying to return to the market the following month, you should notice:"Somehow, trading feels scary...""What if I lose again..."
This time, how to care for the heart and the account injured by drawdowns, and how to restore them to their original state. I’d like to share this with you, borrowing the wisdom of Doctor Elder, about the "gradual rehabilitation method."
1. Prescription for the wounded trader
Doctor Elder once provided psychological guidance to traders at a New York day-trading specialist firm, focusing on those whose performance was not up to par. One day, he met a man who kept trading every day like an obsession, despite losing for 13 days in a row. Normally, he had permission to buy or sell up to 700 shares per trade, but due to consecutive losses, he had voluntarily reduced his size to 500 shares.
What do you think Elder Doctor prescribed to him?
"From today, reduce your size to 100 shares."
That was the doctor’s instruction. The man protested strongly, saying, "This isn’t a joking matter. With 100 shares, I can’t make money at all!" He believed that he must recover his losses, and such a small size wouldn’t matter. However, the doctor replied, "You wouldn’t have made money even with 500 shares," and forced him to accept this rule.
2. Gradual ascent by building small success experiences
What happened as a result? The man who reduced his size to 100 shares ended up finishing every one of the following four days with a "win." The amount earned was small, but it was a long-awaited "victory" for him.
The doctor then gave him clear rehabilitation rules."If you can win for two consecutive weeks, you may increase the size to 200 shares per trade. If you can win for another two consecutive weeks, next increase to 300 shares."
However, strict conditions were also attached."If you lose even for one week, return to the previous (smaller) size."
Thanks to this rule, he learned to reduce size immediately when problems arose, minimizing damage.
3. The staircase of risk should be climbed slowly
This episode teaches us something very important.
The larger the risk and the deeper the drawdown, the more our "ability to respond" is diminished. If you compare it to driving, it’s like trying to open a highway at full speed right after a major accident. To be able to accept risk gradually, we need to follow well-defined steps and retrain ourselves.
If you want to return to trading after a severe drawdown, apply this especially effective method (reducing the risk size by one step). And if you lose in a single period (a few weeks, for example), you must reduce the risk size by another step. To gradually raise size, you must have a consistent record of "wins" for a certain period (for example, two weeks) without fail.
