By Cliff Clark

This is a question that haunts many traders new and experienced alike. Can you avoid prolonged draw down periods in your account? Every new trader deals with this problem. There two types of draw down periods. There is the common draw down period associated with the development of an inexperienced trader. When a trader establishes his trading plan and commences his learning curve, he'll have to face these periods of losses. These draw down periods can rarely be avoided. They can be planned in such a way that they won't represent a danger to the trader's account. This is achieved through a proper plan that establishes minimal risk exposure for every position taken by the inexperienced trader, example $10 risk. Then there are those draw down periods which occur after the trader has achieved a certain level of consistency, when he is supposed to be able to handle himself effectively. Can these draw down periods be avoided? Probably not totally but they can be minimized. Lets explore.

Prolonged draw down periods in any trading style seem to occur when a trader uses a trading style that can't adapt itself to different market conditions or that the trader isn't even aware of what the market conditions are doing before entering a trade. How often do you enter a trade only to find the market is doing the opposite of what you expect your stock to do? If you are a swing trader do you continue to take swing trades when the market is making wild swings from one day to the next? How about your day traders. Are you still taking four or five trades when you hate your gap list or when all of your gaps go the other way at the open, poking and hoping something will stick?

I feel that I am pretty adept at avoiding draw downs in my account. I rarely have a losing week. The reason is my ability to determine the type of market we have on any given day and whether the stocks on my list will work in that market. I tend to average around 2.25 trades per day over the long run. In recent months, in this crazy market we've had, I have been averaging a mere 1.5 trades per day. Why? Because I can recognize when the market has the upper hand and when that happens I just sit out. If I am sitting on my hands my account is safe. You've heard the saying, SOH is a position! I have another, “when in doubt sit out”!

When you learn to recognize the market conditions on any given day (or week, month depending on time frame), and can choose the appropriate stocks for trading that day you'll be less likely to incur prolonged draw down periods.