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The Little Book of Market Wizards: Lessons from the Greatest Traders by Jack D. Schwager

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Chapter Seven

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The Worst of Times, the Best of Times

When Everything Is Going Wrong

Okay, good trading should be effortless. But what do you do when you hit prolonged periods when trading is a struggle? How do you handle the periods when almost everything seems to be going wrong and you are in a steadily deepening drawdown? This question came up in multiple interviews. Even great traders can experience demoralizing losing periods. The Market Wizards were quite consistent in the advice they offered about handling difficult losing periods. They had two basic recommendations:

1. Reduce your trading size. Paul Tudor Jones said, “When I am trading poorly, I keep reducing my position size. That way, I will be trading my smallest position size when my trading is worst.”
Ed Seykota, a pioneer in systematic futures trading who achieved astounding cumulative returns, offered similar advice when I asked him if he had locked away several million dollars to avoid the Jesse Livermore experience. (Livermore was a famous speculator of the early twentieth century who made and lost several fortunes.) Seykota replied that a better alternative was to “Keep reducing risks during equity drawdowns. That way you will approach your safe money asymptotically and have a gentle financial and emotional touchdown.”
Marty Schwartz will cut his trading size to a fifth or even a tenth of normal if he experiences ...

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