How much drawdown can you tolerate?

I have a trend strategy that sometimes runs me into quite a bit of draw down. I don't risk more than 1% of my capital per trade, but when the market goes through a range, I do lose quite a bit at times and can draw down as much as 20%, but when it trends I more than make up for it. If I scaled out, I am sure it would reduce the draw down, but ultimately it would also reduce my gains. I am curious about everyone's tolerance for draw down. Please poll and comment. Thanks.

Maybe you should be looking at how to identify ranging markets and stay away from them.

I put 5...but basically it's 5-7 for me at a max, generally 2.

Yes, I am. That is easier than it sounds though. Often times it is easier to identify them after the fact rather than before. Bigger trend moves start during ranging markets.

I can tolerate 100% but not 5%.. strange but true

This question is really about money management. In my opinion when you open a trade the opening of that position should represent an absolute maximum of 1% of your account (and that's an absolute maximum). A stop loss should be set for an absolute maximum of a loss of 5% of your account.

This allows you to keep trading another day for the inevitable times you end up with a losing position.

This is why in my opinion it's so important to let winning trades run and gather up as much profit as possible. You want the number of winners to exceed the number of losers and the amount of profit a winner makes to exceed the loss a loser makes. Those two things combined makes for a growing account.

Lets say you start having a 10k account. Risk 1% or 100$. If you lose 20%, that would be 2k. Your account balance is 8k. Risk 1% or 80$. If it trends and you have a risk:reward of 1:20 you win 20 % or 1600$. Account 9.6k.

But if your risk was 0.1 % or 10$ you would have a 2 % loss (200$). Account then 9.8k. Next win 1:20 ( 9,80$ x 20 = 196$). Account 9.96k

Thats a 360$ difference.

A beginner should keep that in mind. Trade small until you know yourself and your system and the consecutive losses it may produce.

IMHO, assuming the trader follows the 2% rule I find that 5% drawdown is slightly unrealistic, unless one has a high win rate.
An arbitrary number that I feel is reasonable and realistic is somewhere around 25-30%. May be even higher for those whom strategy has low win rate but high R:R (E.g trend following strategies).
That being said. Psychologically I figure I will start panicking if im down even 5%. I guess its human nature to worry when faced with drawdowns.

Scaling out is a good way to protect profits, but on the other hand it reduces the potential profits you can get, compared to choosing to let the entire position run to its optimal profit target levels. That is a common dilemma in trading.

There is a saying 'never turn a winner into a loser'. So I would say scaling out of a winning position is slightly more commonly used.

Another method is to tighten your stop loss as your position move in your favour by moving your stop loss to a higher support level if you are in a long position (or lower resistance level if you are in a short position).

It ultimately depends on whether you are the type of trader who can stomach letting a position, for example fall from 90+ pips in green back to 10+ pips in green (or sometimes maybe 10+ pips in red) and then make its way back up to 150++ pips in green (or it might go the other direction). From my observation of trending markets, this kind of price pattern movement does happen sometimes.

Scaling out, tightening stop loss or letting the entire position run are all fine. It depends on your trading style and risk tolerance. Just be prepared that if you let your entire winning position run, you have a chance of losing your profits by getting stopped out at breakeven or a loss if the price makes a significant reversal movement.

If you confirmed you are a trend trader, I think you should worry more on your margin level.

this is a good reading

Nope, loosing 1% 20 times in a row does not give you 8000$ but 8179$, then 1 win of 81.79$*20 = 9815$, if you want to calculate a fixed loss of 100$ then you should do so for the winning trade too which would be 2000$ and not 1600$.

There is a method you can consider trying.

For example, 10 mini lots (1 contract) in a long position

1. Take some profit at the first profit target (minor resistance level). Maybe close 2 mini lots for profit.
2. Wait to see if the price reverses back to a lower minor support level (use a lower time frame to identify the level). Take a new long position at this level. Maybe take a long position of 1 mini lot here. It's recommended that you take a smaller position than the ones you have closed out to lower the overall risk. But you can still go ahead and long 2 mini lots if you don't mind the retaining same risk level as before.
3. Repeat this process at every profit target and minor support level as the price moves in your favour.
4. Tightening stop loss of the entire position as the position moves in your favour should be considered depending on the individual.

You can modify by closing half of your entire position at the first profit target (and subsequent profit targets) for traders who are very risk averse.

The pros of this method
1. You let your entire position run
2. You get paid as your position moves in your favour, because you took profits along the way, and re-entered trades as the price do small reversal, to replace the positions you have closed out for profits at the profit targets.
3. Your profit will be even more, compared to leaving your position untouched and running to its final profit target, because you took bonus profit and re-entered positions along the way. (provided you re-entered with the same position size that you have closed out for profit at every profit target)

I have successfully used this method profitably quite a few times before in the past. It works very well for strong trending markets.

I mentioned 'in the past', because I have switched from day trading to swing trading. It is slightly harder to apply it to swing trading because I don't monitor the market for hours at end now. I only check the market once or twice a day. My trade entries could be triggered any time I am not monitoring the market. When that happens, I would not be able to actively manage my trades.

If your trading makes up for the drawdowns when right...
Simple reduce max position size to something where you can tolerate the drawdown better...ie. If risk 1% per trade can result 20% drawdown, means risk 0.5% would result only 10%...and so on.
Sure it reduces return as well, but helps to sleep worry free at night.
If you trade a small account, probably still want to swing for the higher return, but at some point the lower drawdown will just start to make a lot more sense.

Drawdowns are just a fact of life for trend following. If it is any consolation the top CTA's in the trend following space have received max drawdowns over their long lives of between 10% - 60% and most are entering max drawdown territory as we speak given the mean reversion nature of the market post 2008.

couldn't vote .. I accept 100%

Imagine two traders. Al risks 10% per trade with a RR of 1.2. Bob uses a martingale.
After 4 losers Al lost 34% of his account. He can recover in 3 trades.
After 4 losers Bob lost 15 units and stops the marty. He needs at least 16 trades to recover. 5 times more.

Tolerable DD is not about personal preference. It is about expected time to recover.

BlackNapkins is right. If you don't tolerate 100% loss you put too much money at your boker's. More than you can aford to lose at least psychologically.

Hi, where I can go to see these stats live?

Hi R. There are a few sources such as;
1. Barclay Hedge;
2. Wisdom Trading;
3. Altegris; and
4. IASG

..but my preferred source is IASG given the great powerful back-end database it provides and the email notifications. Just note that updates are monthly. :-)

C

It depends... are we talking about all your captial that you plan on using for retirement? The golden rule for that is 4-5%. However if you are say playing some risky new strategy's or want to test out a high risk/reward system then I see no problem in hitting 20-30%.

I think this chart pretty much sums up why you don't want to go past 50% though, it makes the system/strategy absolutely useless if it is exceeding 50% as the gain back up would require double the effort.