What Kinds of Drawdown Should You Expect?
The drawdown in your portfolio will typically be correlated to the level of risk exposure of your trading strategy. If your strategy is systematic, you can base future drawdowns on historical maximum drawdowns. If you are a relative value trader, who is looking for a currency pair to rebound after a substantial dip, then you should have an idea of how far you would let your trade move against you before you cut your position. Using historical data to determine theoretical past drawdowns is a great way to gauge maximum drawdowns or drawdowns over a certain period. But always remember, that your worst drawdown is yet to come.
The reward that you experience is predicated on the risk you take. If you are using a trend following trading strategy such as a moving average crossover, you should expect that the strategy will lose more than it wins, and, that you will experience prolonged drawdown, until the market begins to enter a trending phase.
When you design your trading strategy you need to be cognizant of the types of drawdown you expect to occur, and be willing to accept this drawdown as part of your trading business.
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The drawdown in your portfolio will typically be correlated to the level of risk exposure of your trading strategy. If your strategy is systematic, you can base future drawdowns on historical maximum drawdowns. If you are a relative value trader, who is looking for a currency pair to rebound after a substantial dip, then you should have an idea of how far you would let your trade move against you before you cut your position. Using historical data to determine theoretical past drawdowns is a great way to gauge maximum drawdowns or drawdowns over a certain period. But always remember, that your worst drawdown is yet to come.
The reward that you experience is predicated on the risk you take. If you are using a trend following trading strategy such as a moving average crossover, you should expect that the strategy will lose more than it wins, and, that you will experience prolonged drawdown, until the market begins to enter a trending phase.
When you design your trading strategy you need to be cognizant of the types of drawdown you expect to occur, and be willing to accept this drawdown as part of your trading business.
Read more here
MA provides the market's current direction and strength.