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Drawdown: how does it affect your trading and account

  • Post #1
  • Quote
  • First Post: Aug 6, 2017 9:29pm Aug 6, 2017 9:29pm
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 .
ONE MUST LEARN, DO IT AND IT WILL BE KIND TO YOU
DD gives me motivation and excitement and purpose.
Nothing better than a 95% 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.
It's like quicksand that you cannot get out of.
You came here for the truth and let me unveil it for you
Quoting RondaRousey
DD 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.

thanks Ronda you think the same as me many a time with large drawdown ended with a great profit later
ONE MUST LEARN, DO IT AND IT WILL BE KIND TO YOU
the 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 questions and threads should be divided up between toy money traders and demo jockeys, and those who actually trade an account size where they dont even want to entertain the thought that normal routine can get them into 40-60-95% DD.

most "traders" will without a second thought gamble away 20$, 100$, or even a 1000$ account here on FF, a fast look into the journal section should confirm this promptly...
time to time few gets lucky and makes big % gains on his/her tiny account, for a short while, and some when in a loss are able to turn around the drawdown. most however arent that lucky.

so far i had seen not one who had started out in the same journal section with 10k-100k account and traded gambled his/her way to 1000+% within weeks, or even months.

the point is, there is a completely different mindset trying to get rich quick on 100 bucks, risking all if necessary
vs.
having 10k or more and risking all.
would i sell my house to try to make 15% weekly gambling it to billion in 2 years? most certainly not.
and i doubt most would!!
i often think that those who throw these big drawdown numbers around as acceptable, never traded a 5 digit live account (maybe cent, or demo).
if they would they would definitely think differenty about drawdowns, and what is the acceptable level psychologically on a large(r) account.
those who actually have larger accounts and lose all, dont tend to just put up the next large account of the same size again.

as a final thought, those with larger accounts dont have to rely on the principle that bigger risk equal bigger return, and thus accept the larger drawdowns that usually comes in tandem with this.
there is always, always another trade!!
Quoting profitfarmer
the 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...
well thought out thank you for your reply
ONE MUST LEARN, DO IT AND IT WILL BE KIND TO YOU
It is better to cut your draw-down short rather than waiting for the recovery.........without this mentality you have no chance to survive long term
atheer1
Quoting atheer1
It is better to cut your draw-down short rather than waiting for the recovery.........without this mentality you have no chance to survive long term
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.
Quoting Copernicus
{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.
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 try Forex_
The arriving better than the arrival, the journey has just started
I limit the dd on any single trade to no more than 1-2% of my margin account. So, dd has little impact on my account, but can impact my trading. Suggestion: instead of letting a trade's dd hit 20%, take the 2% loss, flip the trade, and make the 18% going the other way. Don't know how to do that? Learn to trade.
Here's my take on drawdown. It destroys a lot of traders' confidence in their strategy for one thing. It happens in every strategy, but particularly heavily so in trend strategies, strategies that use excessive leverage, and many day trading strategies. Drawdown is simply volatility. Higher volatility = higher risk. Risk and reward obviously move in tandem. Many traders that double and triple accounts in short periods of time, do so with huge drawdowns. That's why they blow up eventually. If you are risking too much for your account size, you are only a couple of trades away from destruction. Most importantly, traders who trade for a living, cannot accept ridiculous drawdowns, because cash flow timing matters when you have bills to pay! You can't afford for your account to drawdown 50% and still expect to generate enough profit from that to pay your rent. When and if you make 100% again on the account is not something your landlord is going to wait to find out.
  • Post #11
  • Quote
  • Edited 7:46am Aug 8, 2017 12:17am | Edited 7:46am
Quoting jenbols
{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...
Hi J

The critical things you need to know to evaluate your systems robustness are as follows.

 

  1. The risk of ruin. This needs to be 0 to ensure long-time survival in this game. More about this here (bettersystemtrader.com/riskofruin/).
  2. Your long term expectancy. More about this here. (www.vantharp.com/tharp-concepts/expectancy.asp)
  3. Your trade frequency (or opportunity). This is required with your expectancy to calculate your anticipated return stream and hence your level of capital required.


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.

Quoting Copernicus
{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...
I love your music. I love this post even more. Next time I'll just reference to this post to explain stuff.
Quoting profitfarmer
the 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...
A very good observation and explanation.
Attached Image
When the going gets tough , the tough get going
Quoting Copernicus
{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. ************
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_
The arriving better than the arrival, the journey has just started
  • Post #15
  • Quote
  • Edited 7:55am Aug 8, 2017 7:04am | Edited 7:55am
Quoting jenbols
{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_
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.
Quoting Copernicus
{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.
thank you again Copernicus your input helps people learn
ONE MUST LEARN, DO IT AND IT WILL BE KIND TO YOU
Quoting jenbols
{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_
ONE MUST LEARN, DO IT AND IT WILL BE KIND TO YOU
learning is the key
ONE MUST LEARN, DO IT AND IT WILL BE KIND TO YOU
Quoting Aussi
learning is the key
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'.
Quoting Copernicus
{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'.
mate just from the heart if you have any other thoughts on trading for beginners please expand here , all subject are welcome from you kindest regards from dave
ONE MUST LEARN, DO IT AND IT WILL BE KIND TO YOU
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