This is an extract from the live room where I was asked about aggressive drawdown control. At the time, AUDNZD was squeezing pretty hard, so it was a good time to look at ways to do aggressive DD control to help escape a trading position that is going against you. Position trading means you will at times get into bigger drawdown than you like and there are many ways to get out of it with aggressive drawdown control, so I cover how I do it and some live examples.

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Video Transcript

So, basically, drawdown control, there’s multiple ways to do drawdown control. As you can see, I’m just about to get stopped out in one here on the Aussie New Zealand. So drawdown control, obviously you only do when you are in deep drawdown. So whatever your level is, where you’re getting to, I’m worried about this position, that’s when you start your aggressive drawdown control. As you can see, drawdown control, I am doing now on this account and on my other account as well. I’m doing this constantly. I think it’s a much nicer way to get out of trades which are going against you because you’re getting your lot size reduced gradually and you’re taking very small losses along the way to that profit. When you’re in a squeeze, however, obviously it slows down the speed of drawdown that you get into when you do it as we’re doing here gradually. Every one ADR is taking off a third of each trade. So you get to that level of uncomfortableness, which for me is about 3% on a position, slower. But when you get there, the chances are you are going to get that move happening. So the point of aggressive drawdown control is if you’ve got into a trade and it’s moved against you to such an extent where you’re thinking I’m in too much deep trouble here, 3% drawdown on my account on this trade, typically it will be one or two weeks in. And if you haven’t had an out in a couple of weeks, the odds of that elastic band snapping and that drawdown disappearing in one day is very high. Because when you look at a normal market, you will find, there’s an example there, right? This is where we are at the moment. You will find in a normal market, you tend to see cycles of three to five days. So you’ll get three days up, a drop, couple of days up, a drop, three days down, a push, couple of days up, a drop, couple up, couple down, two up, one down, one up, one, two down, one up, two down, one up, normal cycle. So the market moves in market structure up and down in two to three day cycles typically, but up to five days at a time. So I’m just trying to find a five day cycle and I can’t see one on this chart, which shows you how, you know, most of the time you’re in and out of your positions in a week because the market moves up and it moves down. They push, they profit take. A squeeze is where there’s been a fundamental shift or something’s happened to a currency pair where it’s shifted the odds in the favor of one of them way more than the other. You get more than five days movement. By the time you’ve got to five days you shouldn’t be at a level really where you’re thinking, I’ve got to jump on aggressive drawdown control. If you are, you’ve probably scaled in too fast and too close together. So if you’re moving in this sort of distance, which in this case is what, one, two, three, four, five, six, seven, eight, nine days up, you had a little bit of a pullback in there, probably not enough to get you out. You had a pullback in there, probably not enough to get you out. Then you’ve got a complete A-shaped recovery. That tends to be what happens. So all you’ve got to do is try and figure out where the end of this move is going to be, because when this move ends, it’s fast. And it often ends with a big, strong push. And this is a good example, this one actually, but big, strong push. This is the last push. And it’s basically the market buyers going, right, we wanna continue going long. And there’ve been so few sell orders left because everybody’s been run over here, that they run out of people that are willing to sell to them. So they have to reach a little bit further to get to those orders. And what you find is a fast move where they just suddenly go, there’s no one left. And that is where the market turns. Often you will find it’s a previous level of support and resistance. So whenever I get into aggressive drawdown control I’m always looking for obvious support resistances. So here we had two months ago’s, no it’s last month’s high isn’t it, two months ago high, yeah two months high. So this is where I started to do my drawdown control in here as we were approaching this level. And what I was hoping for was a lower high. Reason being is we had a high, a low, a lower high, a lower low. I was looking for a lower high on that. So I started aggressive drawdown control positions there.

I was wrong.

I then took another one the next day. I was wrong. And I will keep doing it until we catch the top of that move, because when we do catch the top of that move, it’s going to be fast, yeah? The elastic band theory, remember from the bootcamp, the further the market gets stretched, the faster the snapback tends to be. Snapbacks off of a profit take in a profit take move are between 38 to 50% retracements of the initial move. So if we know that we’re going to get 90% of the time, a 30% to a 50% move minimum, if not an A-shape recovery, we can get on that with a large position and know that by bringing our average up, we’re going to get out of it really quickly and easily, usually within a day, maybe two. So if you look at this Aussie New Zealand that I’ve got at the moment, aggressive drawdown control, I started here. That was the first entry on aggressive drawdown control. This is that monthly level I was speaking about, this purple line here. And I was looking for a lower high. We pushed up into a propulsion gap. I saw a candle, which looked like it was rejecting. After a big strong push, we were extended on the RSI. And I thought, right, I’ll have a go at one here. It didn’t work out. I got stopped out on it, but I got stopped out on ridiculous spread by the broker, but either way I would have got stopped out on it. Difference is I probably wouldn’t have taken a second one that day, so thank you broker. But that one didn’t work, failed aggressive drawdown control. Then I took a second aggressive here. So the next day we pushed doing Asia up and we had a couple of rejection candles in and we started to make a new low. So we got a reversal alert in there on the lower time frame. So I entered another aggressive drawdown control. Bear in mind, at this point, we are something like seven days

up.

1, 2, 3, 4, pause, 5, 6, 7, 8. We were eight days in. Yeah, five being the normal. Don’t go much beyond that. Six, start aggressive drawdown control. Seven, eight, got to come down at some point, you would normally think. So, second aggressive taken there, so that one failed. Second taken there, market went mental. The next day, we had this massive push, stopped out. Okay, fine, let’s wait for the next one. So, doing drawdown control all along the way on the positions as normal, but this is the aggressive moves. Tried another one, yeah? Yesterday, big strong candle to the upside, rejection. Bulls tried to take control, yeah? We put in a bullish engulfing. Next candle, push up, took out that high, rejected. Sellers, fully in control, bear candle, took a short.

Yeah?

Immediately stopped out on it, and admittedly with this one, I had to stop up there. And I said, didn’t I, as we’re coming down here, I said, I don’t like the look of it, just in case I’m going to reduce the risk. And I did this in the New York session yesterday. Glad I did. So I reduced myself from 1.2% risk to 0.5% risk. Stopped out, pushed up, accumulated through New York. Today, we’re in one. So I took another aggressive drawdown control position here as we pushed up above that high and we started to pull down, I took another one. Bearing in mind now we’re above this monthly high, so my thinking process here is, okay, the monthly high didn’t hold. What happens if we don’t get a bounce off of a monthly high or a lower high? We quite often get a failed breakout. This is my breakout play. I’m looking at, right, we’ve pushed up, we’re possibly now going to be doing a false breakout. I’ll get in with another one. So if this is going to be a false breakout on the monthly level this is it. This is what you know the smart money concept traders are going oh this is liquidity run this is buy side liquidity on the monthly level. It’s not just market movement but false breakouts happen so therefore short. So I’m taking these positions, I’m using somewhere between half to a full amount of lot sizing. So at the moment, this is a six.

Yeah, so this aggressive drawdown control position here

is a six, six lots. The reason that is a six lots, if you look at my total lot sizing on it, is because I’ve now got 16.28 on. When I took this trade, six was over half of the current lot sizing on. Yeah. So I would say, let’s say for example, we’re going to do aggressive drawdown control position on, let’s pick this one here. This one that’s at 2%. 7.22 lots on. So I would be looking at that going, right. If I’m going to get an aggressive on that, it’s going to be a minimum of 3.5 lots. The whole purpose of aggressive drawdown control is to get this average as close as possible to price so that when we do get that move start, I can get out of this aggressive drawdown control position and do some drawdown control. This, all of this will be used to cut this down here and get this under control. That’s the purpose of it. We’re looking to get in just to get control of the market, control of this position. It’s out of control. You’ve got to slow it down and stop it. So to do that, we need to reduce the lot sizing. But the only way we can reduce lot sizing is by getting in with a big lot to bring our average up so that we can make a decent amount of profit on one big, quick, fast move that we’re going to get with a stop loss trade. And then we’re going to reduce some of these lower down positions, yeah. So that one looks like it’s going to stop out. So the loss on this is going to end up being 1.1%. So whenever I’m getting into aggressive drawdown control positions, I never want to risk more than 1.5% of the account on an aggressive trade. If you just think about what I’m doing here, I am literally reverting from I’m no longer position trading, I need to take a stop loss trade. So this is a standard stop loss position. I’m getting in with 1% risk or thereabouts on this entry. I’m giving the entry plenty of room to breathe on the hourly timeframe. I always use the hourly timeframe because it’s smooth.

And that’s it.

So it’s a stop loss trade with roughly 1% risk, 1.2% in this case. Stop loss placement is as far away from that thing as I can possibly make it with 1% and see what happens. If it stops out, it stops out. So if this stops out, this will be the fourth failed aggressive drawdown control. At some point, if this thing continues in this parabolic move, which looking historically, it’s not often you get these parabolic, I mean, Aussie New Zealand actually, to be fair, is probably one of the worst examples. You do get these parabolic moves. This one here, I got stuck long on, yeah, because I wasn’t paying attention to fundamentals. In this case, I do not believe this is a fundamental move. The Aussie dollar fundamentals do not point to the Aussie dollar, New Zealand dollar doing that at all. They just didn’t increase their interest. No way they did increase their interest rates, but the New Zealand increased their interest rates and the market came down. That’s not right. There’s more strength coming through in that New Zealand dollar at some point soon. Unfortunately though, the Aussies did increase their interest rates. However, the market wasn’t particularly impressed with it. So I don’t know what’s going to happen with this, but at some point I will say, right, aggressive drawdown control is not working and I will cut off of this position off. So I will probably have another go at it, but you’ve got to look at where the next level of aggressive drawdown control is gonna be. And look at history for previous examples

of what has happened.

The market repeats itself, never exactly the same, but always roughly the same. So when you get a parabolic move like this, which has moved so fast, so hard with zero profit take. You know the banks are sitting there going, we have got so much P&L on our Aussie New Zealand logs. When we get out of this boys, we’re gonna go and buy a new Ferrari. They can’t buy that Ferrari until they hit the sell button. They have to get out of the position, have to sell. So when they sell, it comes down very, very fast and hard. Parabolic moves tend to have big drops, very quick. Parabolic drop, parabolic drop. So that is what we’re waiting for. And our job with aggressive drawdown control is to make sure that when we get that parabolic drop, we’re in it with as much skin in the game as we can possibly get. Big loss, big risk. But look at my average. My average position, this red line here, is at ADR. If I didn’t have that aggressive drawdown control position on my average would be somewhere around about 175 ADR. And ADR is easy to hear. 200 ADR, it’s got a 3% chance. So I’m just moving my odds of being able to escape when that parabolic profit take move starts in my favor. And what am I doing? I’m risking 1% for the privilege of moving that up to there. That’s the way you’ve got to look at it. It’s a calculated risk. It’s a business risk. Businesses lose money. They make the wrong decisions. I’ve made three wrong decisions so far. This possibly is my fourth.

My PIP’s away from being the fourth.

However, this thing could give us a reversal alert in the next handle, and then just go bang bang bang and hit this support. When it hits that support I’m sitting in roughly one and a half percent net profit on the entire position. My decision then is scrap it get out and go I hate that not trading that again I will but that’s what my brain will be saying right now when that closes or I take that off that aggressive drawdown control position, bank, whatever that is, 2.3%. And then I use that 2.3%, that $2,300 to get rid of that completely, that 1.22, remove a third of that, and we would be above that. So remove maybe a little bit of that. Leave that one on.

Yeah. And our average,

when we take that aggressive drawdown control position off, will be somewhere around about there, which is within an ADR. So if we get this move, where we go parabolic for seven to 10 days, yeah, what happens after that? We get a pullback. That pullback is gonna be more than a day. If that happens in one day, what do you think is gonna happen the next day? Up and down candle. What we normally see, A-shaped recoveries or 50% pullbacks. So think of a 50% pullback on this move. And this is where your aggressive drawdown control

can make you an awful lot of money.

This six we’ve got on here, if I hold this and I do not take it off here, I’ve got a TP placed here because I want to get out with some money so I can do drawdown control. That’s me. If you don’t do that and you hold onto that and you assume you’re going to get a 50% retracement down to there, that one position, yeah? Just that one position on its own. So you can use a great, and I’ve done this in the past, I don’t really like to do it, and I don’t do it often because it’s kind of gambling, isn’t it? I’m hoping that we get a 50% retracement, but even if we only got a 30% retracement on, which is gonna be to there. P&L on that is gonna be 5% on that one trade. So you’re gonna bank 7 to 10%. Look at my P&L from yesterday. I did aggressive drawdown control, or aggressive drawdown control and normal drawdown control to the tune of 5%. From there to a 200% ADR move, i.e. a two day drop on this parabolic move, completely undoes that. That’s your choice. There is no right, there is no wrong. Aggressive drawdown control is about bringing the thing into control. If this thing goes bang, hits that level right here, and goes like that, I would be thinking very hard about whether or not I want to close it. Because the fact that it’s hit this resistance, previous resistance, and hasn’t turned into support would tell me that maybe they want another leg down.

Should I hold it?

Your decision is then, do you hold it? So what you could do is put a trailing stop on it, at that level, and if it does continue down, brilliant. We might get some news coming that makes this thing just go pop, pop, pop, and hit 200 ADR. You’ve no idea. This is the markets, incredibly unpredictable, completely random, anything can happen. So those are your options, and that’s how you will execute it. If you do aggressive drawdown and control five or six times, and it doesn’t work, virtually every time, when you say screw this I’m cutting these two I’m just going to take the 3% it goes back so I always try and hold on for as long as I can my uncomfortable level is 3% I’m sitting in five and a half because this thing has gone parabolic now for one two three four five six seven eight nine ten 10, 11 days up. Go onto instruments and find 11 days in one direction. It is so unbelievably rare before we get that parabolic move. Yeah, so here’s a really good example of one actually, look here. On this one, we only got a 23% retracement. Yeah, so you would have needed, in this point here, you would have been thinking, nope, I’m out, loss, it’s a loss, we take losses, it’s a position trading strategy, it hasn’t got a lot of losses, it still takes losses, you’re not gonna survive in this without taking losses, you’re always gonna have losing weeks, you’re gonna have losing months, yeah, that would have been a losing month if I had have been long in CAD Swiss, and I hadn’t had an opportunity to get out of it. But the aggressive drawdown control position that you would have taken down here, when that move happened, would have got you out the entire position because that move was more than an ADR.

ADR is 47.

That move was 195 pips. So there’s an exit there. There’s an exit there. If you’d have taken aggressive in there. Don’t forget this is a daily chart. So that’s basically how you would do aggressive drawdown control. Let me just take that clip off of that.

I’ll leave it on actually so we can see that.

So in a nutshell, that’s it. There is no right, there is no wrong. The key rules are half of your initial position that you have open minimum, yeah? Depending on how confident I am on the level that we’ve got to, I may take the whole thing. So a 7.22 for example short on the New Zealand dollar CAD. So we’re currently got a long on it. Sorry, not short. We got 7.22 long on it. So if we want to do an aggressive on that one, New Zealand dollar CAD down here, I might look at this one and go, if we get down and this level here, we get a nice bullish bounce. I might go 7.2 long, there, stop loss under that load. If that turns out to be 1.6% instead of one and a half, whatever, that 7.2 long brings that average from there. I mean, it’s within an ADR, so I would never do aggressive on this anyway, but the average from there basically would suddenly jump down to here. So literally we’re looking for even a small range to form to give us an exit, yeah? So you’ve got, those are the options you’ve got. It’s either a, right, let’s go for it and kill the crap out of this and make an absolute fortune. Get me out of break even, let me walk away with my 2% loss that I’ve made and draw down control and go, phew, learned a lesson there. Or you get out with some profit, reduce the position and assume that it’s going to continue to move to make you profit. Again, no fast rules, no hard rules. You do what you feel comfortable with and you have to try this. Sometimes I’ll look at it and I’ll go, that is the best candlestick I have ever seen off of this area. And I think that is the best thing since sliced bread. I’ll get in with a hundred percent of the position. Other times I’ll go, this inside bar here, which is closed, the next candle closes as a ball candle and I’ll be thinking, right, this looks like we might be doing some kind of symmetrical contraction and I really like it long. I’ll get in with 50% of my total lot size. I would take a 3.5 with a stop under there. Tight stop, 3.5, that’s probably only gonna be 0.75 risk, but it will bring the average right down and you’ll be able to achieve it if it works. Think about trading as we know is a 50-50 shot. Every time you hit the button you’ve got a 50% chance of it going up in your direction or hitting your stop loss. So every time you try an aggressive drawdown control position there’s a 50% chance it’s going to work to a degree. It may not go as far as you want it to, but it will go into your favor. If it goes into your favor, protect it with a stop. You’ve got a big risk on the table there. Don’t leave that risk on permanently. Take it off, reduce it. If that pushes down for three hours, bring that stop with it. Trail the stop. So, that’s literally the way I see it. And they are just normal trades. So if this thing now for example Aussie New Zealand does that gives us the hourly reversal then pushes down and pushes down and we’re suddenly this afternoon sitting at ADR in that propulsion gap there will be a stop loss at break even on that. Right pressures off I can think now what do I want to do analyze the news what’s coming up on the news we’ve got the Canadian announcement coming up at three o’clock. If we’re sitting here and you’ve got a break-even opportunity on this, 10 minutes before the Canadian dollar news is coming out at three o’clock on the interest rates, what do you do?

No idea, it’s up to you, isn’t it?

You can close the whole thing. You can close this position. You can leave this here and hope that the Aussie completely collapses when the Canadian dollar rate comes out. It could go the other way, in which case you stop at a break-even and you’re back to square one. You’ve got to start aggressive drawdown control again.

If I had a crystal ball

and I could tell you what to do at that position, I would. I’ve never had to.

Yeah. The other thing you’ve got to think about

is what your situation is this day, this week, this month. When this gets to break even, yeah, there’s gonna be different things going through my head when we get there. So I now have an opportunity, that 5% is now 0.00. I am at break even. I have lost money on Aussie New Zealand, probably around about two to 3% on these scale outs on the way on the normal drawdown control that has been done along the way. So I can close this now and go, I lost 2% on that in a week. I only made 18% last month. So who gives a crap? I’m miles ahead of the game. Or I can say, Aussie New Zealand, you owe me money. I’m holding you. But what is happening here is going to determine what you do at this point as well, psychologically. My P&L is sitting at 1.25% on this account. So when I get back to here, I’m going to close this out after having taken a loss and I’ve got 1.25% loss so far on the month. I can walk away and go it’s the seventh of the month, whatever. I’m just on 1.25%. I’ve got time to get that back up to 5, 10% this month. Happy to do that. Or when I get to this point here, this afternoon, that has reversed, that has reversed, that’s banked, that’s banked. This is now sitting at 2.2% for the day. The drawdown on everything else is pretty much flat and this is now flat. This is showing as a positive figure. That’s gonna change my mind as to what I do here. Because right now, you’ve got to get out of the thought process of thinking this owes me money. Yeah, this Aussie New Zealand doesn’t owe me a thing. It’s a financial exchange rate, right? It’s moved. My EA has scaled me out of positions on it and gone, that’s not going well, let’s take some losses along the way. That was yesterday, last week, last month. Today, right now, this instance, none of that matters. This is what’s important, this is what’s important. These two things alone will make a decision here. What’s happened here, I don’t care. That was a bad trade on the Aussie New Zealand. It didn’t work out. I’ve had loads of good trades over the last month, which have made me 18% profit. So right now, that 18% profit I made last month is also out the window. This is this month. Last month, you’re only as good as your last month of trading, right? If you’re having a crap month, you’re not good this month. Last month, I was good. This month, I’m not good. What I was last month has got nothing to do with what’s gonna happen for the rest of this month. Reset every day, reset every day. Nothing to do with yesterday. It’s got anything to do with the day. Friday made 8,000 pounds scalping. Got nothing to do with today at all. Today it’s made $3,000 loss. Nothing to do with last Friday, is it? What happened yesterday? It’s got nothing to do with what’s gonna happen today. Just because yesterday was an update doesn’t mean today’s gonna be an update. This could be a massive down day today. The decision-making process here is gonna be based on where you are comfortable. If you’re in huge drawdown, so when we get to here, if that thing still says 7%, I will probably take it off because it’s too much pressure. If when we get down to here, this thing says 1%, I’ll be going, maybe I’ll just close that out and I’ll close out Hark, and we’ll give it tomorrow. You can’t make that decision until you get to it. In the same way as when you’re scalping on the five minute chart, you can’t make a decision until that candle’s closed. If that candle closes, as in like right now, this is an hourly chart, obviously, but there’s your high and low, right? This is an inside bar. What is that? Indecision, pause. The market really doesn’t want to go higher at the moment, does it? Yeah, so when you get here, if the market has a massive bearish candle like that with a huge wick on it, that’s hugely bearish. So when you get there off the back of a massive bear move, these guys are on your side. Do you want to just take it off because you’ve got there after these guys are saying we’re shorting it like crazy. If the next candle closes after that big bear candle, when you get there, and what happens is it goes like that, you might have a different thought process on it. But even so, that’s a lower low and a lower high. Bearish, just because the bulls won that round, doesn’t mean anything. What it means is we’ve hit ADR, we’ve run out of steam for the day. So we’re not gonna go short anymore. Doesn’t mean we’re gonna go long. Again, you can’t think like that. You have to think right now, what’s my situation? Do I need to take a breath? Do I need to take a breather? Do I need to just close this lot out and go, whoa, that was horrible. I don’t wanna go through that again. Analyze it, what went wrong?

Nothing went wrong.

This case, I did nothing wrong in this, absolutely nothing wrong. The New Zealand dollar interest rate came out positive. They increased it, all good, brilliant. We’re expecting that, that’s fantastic. Why is the New Zealand dollar weakening? Absolutely no reason for it. Well, that’s fine, then let’s get insure. Absolutely nothing wrong with that trade entry. That was in line with fundamentals, we had a massive propulsion move, it was not right, it looked like a fake move, it looked like an incorrect move. The next day it pushed up harder, and then it came back down again, we’re like, yeah, okay, well this looks like it’s gonna come down and test the area. Since then, nothing but pain, nothing wrong with that decision.

This is part of position trading,

these things you cannot avoid, so you just deal with them. these things you cannot avoid, so you just deal with them. And that’s part of what the aggressive is all about.