Internal Risk Control

This is for those who have trade a few years profitably.

Do any of you implement any risk control on your drawdowns? I think since it takes a little more money to recover it's important not to let drawdowns get out of hand

I am thinking of doing something like this.

I would start with 2% of equity for each trade.

Once I reach -10% drawdown, I reduce my risk to 1%

Once I reach -15% I would use 1% on each trade

Once I reach -20% drawdown I use 0.5% on each trade

Then past -25%, I would stop and demo trade for 3 months until profitable for 3 months before resuming.

I think this way, I am digging smaller everytime I'm in a hole, until maxed out at -25% where I will stop and demo.

What's the disadvantage of this?? Is this a good idea? Would I miss out once my drawdown phase is over and I end up with small position when I enter?

I think it is a very good idea. You've probably read the turtle trader PDF file that's out there. In it they have a strategy that's similar...

"The Turtles were instructed to decrease the size of the notional account by 20% each time we went down 10% of the original account. So if a Turtle trading a $1M account was every down 10% or $100,000, we would then begin trading as if we had a $800,000 account until such time as we reached the yearly starting equity. If we lost another 10% (10% of $800,000 or $80,000 for a total loss of $180,000) we were to reduce the account size by another 20% for a notional account size of $640,000."

Personally, as I haven't been live trading for long, I've tightened this rule up a bit. If I ever drop by more than 10% over a week I stop trading and go back to demo until I've remained profitable for a month. Has only happened once, lost $100 of the initial $1k, went back to demo and proceeded to blow out the demo account before fixing the problem.

Obviously the downside of sizing your position based purely on drawdown would be a reduced net upside if/when the trend reverses in your favor. In an optimized mechanical system that needs to max it's upside to reduce the net effect of drawdown it could be a problem, but in a discretionary system where human error is the most likely cause... it could be useful. The trick then would be somehow sizing back up as you climb out of the hole.

I think you could vary the theme quite a bit, ie: adjusting your risk % based on your win/loss rate up to a certain number. That way as your expectancy decreases your risk would decrease and vice-versa, taking advantage of the higher expectancy.

Since you're a multicurrency trader like me, I suggest to control the risk exposure of all opened trade.

my risk exposure strategy is like this :
- I mainly use non crossed pairs. GBP EUR AUD NZD CAD CHF JPY
- I make them into 3 groups.
- 1. GBPUSD EURUSD as 'normal' currency.
- 2. AUDUSD NZDUSD USDCAD as 'commodity' currency.
- 3. USDCHF USDJPY as 'equity' currency.
- Rules no. 1. Never open more than 2 position if the currency is the same group AND both position is still exposed to risk (ie. no partial profit taking + breakeven SL yet)
- Rules no. 2. Max allowed risk exposure is only on 2 position, and both position HAS to be in a different group.
- Rules no. 3. Total risk exposed position size must not exceed 4 times of real account balance.

so far with this I've manage to limit my drawdown to 2% (with %R per trade setup is 1%) I know the possibility of having several consecutive loss is still there, but I believe the consecutive loss process will be slowed down with this.