A valid point of trading accounts is the so called draw down how does it affect your trading and how does it affect your account as a trader .
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DislikedDD gives me motivation and excitement and purpose. Nothing better than a 90% DD and to trade out of it and turn it into profit. If you cannot trade out of your DD you are finished in this caper.Ignored
Dislikedthe larger the drawdown, the greater the profit OR the greater the chance to fully blow up the account. but the talk is often in general terms, and very rarely comes down to the specifics, ie. the trading account size and the real psychology it has on the trader. it is very easy to throw around numbers that 40% DD is fine, 60% DD i dont care, and 95% drawdown you should be able to trade your way out. if one is a good, or least responsible trader, wouldnt even get to that point, to start with. ( forget black swans for a moment)... by all mean, threads...Ignored
DislikedIt is better to cut your draw-down short rather than waiting for the recovery.........without this mentality you have no chance to survive long termIgnored
Disliked{quote} For the vast majority of traders....a drawdown is just a short term symptom of a slightly longer term problem being total risk of ruin. Drawdowns are only useful for those that can survive them and to achieve this over any extended duration you must have an edge. For those traders that have never tested if their strategy has legs over a broad range of differing market conditions (which is probably most retail traders), then you need to have a plan in place to determine when too much is enough.Ignored
Disliked{quote} As Usual wise words Copernicus RE:><"Useful for those that can survive" / "must have an edge" / "plan in place to determine when too much is enough'' I am still learning how to determine "How much is too much", which is not often how much %tage i risk of my account it was easy when I started, but as time passes by the need of a Plan in Place (with small revisions, but not with many changes) gets stronger. Psychologically is being a big step for me, and i agree with someone who rightly said .. If you think that Rugby is tough, then you should...Ignored
In determining your max drawdown tolerance which is used in determining your risk of ruin, you need to assess what level of capital loss you are prepared to endure before you call it a day with your strategy. Obviously this level increases as your capital stake decreases which is a natural symptom associated with your psychological risk tolerance. Having more capital at stake tends to make traders much more risk averse.
Once these calculations are performed (which is only possible with a very large data set...and hence the need for extensive backtesting), you can then set your leverage with position sizing to meet your risk tolerance levels provided of course that the future endures a similar set of market conditions to the past. Obviously the more comprehensive the sample size (from your backtest), the greater ability of your backtest to capture a broader range of market conditions.
When you do this exercise you quickly realise how most retail traders and their risk appetites will not avoid risk of ruin. The probabilities virtually guarantee it. This process ensures that your risk appetite is balanced against more realistic return expectations. Once this is achieved you can then assess in a far more rigorous manner if your strategy has an edge or not. Most newbies to the game think their good performance returns demonstrate a statistical edge only to find out that they were trading a strategy that was optimised for a particular market regime.
An edge is a long term statistic that most people simply do not understand. They equate a performance track record of 1-3 years as demonstrating an edge....whereas the reality is that particular market conditions such as mean reverting environments and momentum periods can last anywhere between 5-10 years or longer. The only way to increase your confidence in displaying an edge is through a long term back-test across a broad array of market conditions. It is not the extent of sample size that is important which most people think....though it helps. It is actually the extent and duration of variation of historic market conditions that is essential in determining whether or not your strategy has an edge or not.
There is no guarantee of an edge. There is just a confidence interval you can attach to it........ but to have higher confidence in your ability to survive the markets an understanding of which market conditions your strategy performs in as well as which market conditions your strategy under-performs in is an essential requirement for anyone who wants to survive in this game a long time.
There are very few truly unsuccessful strategies. In fact these are as rare as successful strategies. For a strategy to be truly unsuccessful it has to underperform the frictional costs of trading such as spread, SWAP and slippage. If you reversed a truly unsuccessful strategy, then by definition you would have a profitable one....which is a rare event. The vast majority of strategies that retail traders deploy are simply trading randomness. Many confuse a sequence of random beneficial events as displaying an edge. Most simply do not understand what 'alpha' actually means. They are simply lucky participants of beta.
People often say that trend traders endure high drawdowns. The reality is that there are very few techniques apart from trend trading that can survive longer than say a 3 year period. The other techniques that people compare trend trading to have very finite life times. Their worst drawdown is actually their risk of ruin. To have a drawdown of 55% to 60% over a 20 year trading period is a simple fact of life for trend trading. Most other techniques would not survive beyond say a 3 year time horizon without the need for significant revision.
Disliked{quote} Hi J The critical things you need to know to evaluate your systems robustness are as follows. The risk of ruin. This needs to be 0 to ensure long-time survival in this game. More about this here (bettersystemtrader.com/riskofruin/). Your long term expectancy. More about this here. (www.vantharp.com/tharp-concepts/expectancy.asp) Your trade frequency (or opportunity). This is required with your expectancy to calculate your anticipated return stream and hence your level of...Ignored
Dislikedthe larger the drawdown, the greater the profit OR the greater the chance to fully blow up the account. but the talk is often in general terms, and very rarely comes down to the specifics, ie. the trading account size and the real psychology it has on the trader. it is very easy to throw around numbers that 40% DD is fine, 60% DD i dont care, and 95% drawdown you should be able to trade your way out. if one is a good, or least responsible trader, wouldnt even get to that point, to start with. ( forget black swans for a moment)... by all mean, threads...Ignored
Disliked{quote} Hi J The critical things you need to know to evaluate your systems robustness are as follows. The risk of ruin. This needs to be 0 to ensure long-time survival in this game. ************Ignored
Disliked{quote} Wow Copernicus, you gave me something to meditate upon.. Thank you very, very much, I appreciate you sharing your knowledge saving this post and reading it better at night time when all is quiet and with a more receptive Brain_Ignored
Disliked{quote} No probs J. That risk of ruin calculator is a great tool. Here is a good podcast on the subject of drawdowns if you want to get into the details a bit.Ignored
Disliked{quote} Wow Copernicus, you gave me something to meditate upon.. Thank you very, very much, I appreciate you sharing your knowledge saving this post and reading it better at night time when all is quiet and with a more receptive Brain_Ignored
Disliked{quote} Couldn't agree more. The more we learn, the more we can at least appreciate how to overcome our innate tendencies which is the dreaded 'elephant in the room'.Ignored