Most traders will run a backtest, implement a strategy in live trading, and then largely disregard the backtest.
At any point in time, your list of trades from the backtest might be a few weeks or even months old.
When you’re in a drawdown, the first thing you should do is update your backtest to the most recent trading day.
(It’s important enough that I have code in place to automatically run my backtests each day, and I strongly encourage the traders I coach to do the same.)
Why is this so important?
When you’re in a drawdown, you can feel like your world is falling apart.
Nothing is going right.
You’re starting to have doubts, sometimes serious doubts.
“I knew my success had to end at some point,” you might tell yourself.
Drawdowns have a way of flipping your mental negativity switch.
This is the opposite mindset of what you need to be successful.
Looking at an up-to-date backtest almost always puts you in a productive mindset.
With a backtest as your guide, you can:
- Get a zoomed-out perspective across time (is this drawdown normal?)
- Find concrete things to do to improve your live trading
- Identify ways to avoid poor trades to prevent future drawdowns
Your mental switch flips back to positive almost immediately.
You realize you have plenty of ways to get better.
The perspective you get from a backtest is valuable anytime – but especially when you’re in a drawdown.
-Dave
