Ok, after reading through this thread, and digesting the information presented here (as well as reading the Brijon threads over on Steve Hopwood's site), I have analyzed and come to some conclusions about this trading method.
I know there has been a lot of confusion about how to 'manage the drawdown', and how to do this in a way that results in long-term profitability, but I think I have figured out what this means, and will explain it below.
It is true, that there is no one "true way" to 'manage' your drawdowns with this method. When your account (temporarily) in a drawdown, you have to be creative and analyze the situation, and make a determination at that moment, on how to safely 'hedge' trades that are underwater, in order to prevent the trade from moving any further away from you. And then from there, once the market moves in one direction or another, you can close out one of those hedged trades to lock in those profits and then make a new decision about what to do about the other trade (either replace it with a new hedge or, if the entire basket is in profit at some point, close everything out and start new, etc). The whole method involves making trading decisions in the moment, based on where your account sits.
Having said that, I have come to the conclusion that after you open your basket, and then after waiting and you find/open a trade on the most profitable pair, there are THREE possible scenarios that can happen over the next 12 to 24 hours:
1. The entire basket moves into overall profitibility
2. The entire basket moves against you (this is usually the result of the larger 0.04 trade moving against you after opening it)
3. The pair that has the large trade starts to range, and the overall basket bounces back and forth between positive and negative territory.
Now, because there are so many ways to open the basket and so many different schools of thought on how to open the large trade (and how many pairs to do so etc), that there is no one specific way to react to the three scenarios. Brijon had his own way, Chips and Courtney each have their unique ways, etc. But I think this is a good plan on how to deal with the scnearios and the possible drawdowns:
1. If the basket is in overall profitibility, then you can either go ahead and close the entire basket and start over, or you can close the large trade, replace it with a new 0.01 trade, and repeat the entire process with whatever is the new "most profitible" basket trade at the bottom;
2. If the entire basket moves against you, then you have to determine how far against you it has gone. As I mentioned up above, this scenario usually results when, after you open the 0.04 trade, that pair reverses and moves against you. When that happens, you can hedge the losing 0.04 pair with another 0.04 trade going the opposite direction (freezing the loss) and then look for a new bottom trade to close and replace with a 0.04 trade. This all depends on the available margin in your account. From there, you wait to see what the pairs do. The pair with the bog losing trade will make a price move at some time, and you can close whichever trade is winning to lock in profits, and then from there, make a decision based on the new scenario that you have. Watch your account for the next several hours, and look for a scenario where closing all trades will result in just a tiny loss or a tiny win, and then start all over again. ULTIMATELY, if the drawdown approaches 15%, then just close all trades, accept the loss, and start over.
I dont know what the average 'daily profit' would be for this method (again it would depend on the way you trade this), but lets say it is 3%. So as long you have 6 days that you make 3%, for every one day that you take a 15% hit (a 6:1 ratio), then obviously this system is profitable. The question is, are you going to have more than one 15% day in a row? How many -15% days in a row can you withstand? So far, no one has posted that this has happened (maybe it has, we dont know). But apparantly there are enough people trading this and no one has reported yet, this happening.
3. If your account is fluctuating, you can either do nothing (wait for a pair to break out one way or another), or you can go ahead and look for a second basket pair that is in good profit to close out and replace. Wait another hour or 2 or 3 etc and just see where things are at. If in overall profit, then go ahead and close the whole basket and start over.
HOPEFULLY THIS HELPS, AND CLEARS UP THE CONFUSION ABOUT HOW TO 'MANAGE THE DRAWDOWN'. Ultimately, this method is very flexible, and you can trade it (and also manage the drawdown) in a way that suits you.
I know there has been a lot of confusion about how to 'manage the drawdown', and how to do this in a way that results in long-term profitability, but I think I have figured out what this means, and will explain it below.
It is true, that there is no one "true way" to 'manage' your drawdowns with this method. When your account (temporarily) in a drawdown, you have to be creative and analyze the situation, and make a determination at that moment, on how to safely 'hedge' trades that are underwater, in order to prevent the trade from moving any further away from you. And then from there, once the market moves in one direction or another, you can close out one of those hedged trades to lock in those profits and then make a new decision about what to do about the other trade (either replace it with a new hedge or, if the entire basket is in profit at some point, close everything out and start new, etc). The whole method involves making trading decisions in the moment, based on where your account sits.
Having said that, I have come to the conclusion that after you open your basket, and then after waiting and you find/open a trade on the most profitable pair, there are THREE possible scenarios that can happen over the next 12 to 24 hours:
1. The entire basket moves into overall profitibility
2. The entire basket moves against you (this is usually the result of the larger 0.04 trade moving against you after opening it)
3. The pair that has the large trade starts to range, and the overall basket bounces back and forth between positive and negative territory.
Now, because there are so many ways to open the basket and so many different schools of thought on how to open the large trade (and how many pairs to do so etc), that there is no one specific way to react to the three scenarios. Brijon had his own way, Chips and Courtney each have their unique ways, etc. But I think this is a good plan on how to deal with the scnearios and the possible drawdowns:
1. If the basket is in overall profitibility, then you can either go ahead and close the entire basket and start over, or you can close the large trade, replace it with a new 0.01 trade, and repeat the entire process with whatever is the new "most profitible" basket trade at the bottom;
2. If the entire basket moves against you, then you have to determine how far against you it has gone. As I mentioned up above, this scenario usually results when, after you open the 0.04 trade, that pair reverses and moves against you. When that happens, you can hedge the losing 0.04 pair with another 0.04 trade going the opposite direction (freezing the loss) and then look for a new bottom trade to close and replace with a 0.04 trade. This all depends on the available margin in your account. From there, you wait to see what the pairs do. The pair with the bog losing trade will make a price move at some time, and you can close whichever trade is winning to lock in profits, and then from there, make a decision based on the new scenario that you have. Watch your account for the next several hours, and look for a scenario where closing all trades will result in just a tiny loss or a tiny win, and then start all over again. ULTIMATELY, if the drawdown approaches 15%, then just close all trades, accept the loss, and start over.
I dont know what the average 'daily profit' would be for this method (again it would depend on the way you trade this), but lets say it is 3%. So as long you have 6 days that you make 3%, for every one day that you take a 15% hit (a 6:1 ratio), then obviously this system is profitable. The question is, are you going to have more than one 15% day in a row? How many -15% days in a row can you withstand? So far, no one has posted that this has happened (maybe it has, we dont know). But apparantly there are enough people trading this and no one has reported yet, this happening.
3. If your account is fluctuating, you can either do nothing (wait for a pair to break out one way or another), or you can go ahead and look for a second basket pair that is in good profit to close out and replace. Wait another hour or 2 or 3 etc and just see where things are at. If in overall profit, then go ahead and close the whole basket and start over.
HOPEFULLY THIS HELPS, AND CLEARS UP THE CONFUSION ABOUT HOW TO 'MANAGE THE DRAWDOWN'. Ultimately, this method is very flexible, and you can trade it (and also manage the drawdown) in a way that suits you.