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How much drawdown can you tolerate?

  • #21
  • Edited 10:24am Jun 27, 2017 9:56am | Edited 10:24am
There's some information missing to give a well-founded answer - for example, what kind of returns your strategy generates.

If, for example, it's a day trading strategy and you clip 50% almost every week, then 20% is ok. If, on the other hand, you trade off a 4 hour chart and do a handful trades a month for 30% return in a year, then, clearly, 20% is unacceptable.

So the question should be, which is a personal one, how much drawdown you would tolerate for the return your strategy generates.

Further, there is absolutely no evidence-based rule saying that one should risk 1-2% per trade - it could be more or it could be less, depending on the properties of the strategy.

To find the proper betsize, which will tell you how much to bet per trade to get your desired risk/return profile, the thing to do is to calculate your return to drawdown ratio (or Sortino or similar ratio), and based on that calculate the appropriate position size. That calculation will also tell you how much capital you need to generate the income you expect.
  • #22
  • Jun 27, 2017 2:49pm Jun 27, 2017 2:49pm
Quoting PipMeUp
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.

No way to beat MG ... for the simple reason that I can increase the number of " fake entries", after all it's the number of wins that matters. even if I encounter 17 consecutive losses instead of 6. I plan to withdraw frequently.

statistically speaking, with mg I can turn $500 into $5000 (at least) each year. whilst if I plan to trade with conservative entries and I risk 7%/trade (more = suicidal), some years I can make $5k but some I can make as little as $750.. Idk if you understand what I'm saying but I spent countless hours testing various approaches.
  • #23
  • Jun 30, 2017 6:45am Jun 30, 2017 6:45am
Quoting AlastorFate
Scaling out is a good way to protect profits, but on the other hand it reduces the potential profits you can get, compared to choosing to let the entire position run to its optimal profit target levels. That is a common dilemma in trading. There is a saying 'never turn a winner into a loser'. So I would say scaling out of a winning position is slightly more commonly used. Another method is to tighten your stop loss as your position move in your favour by moving your stop loss to a higher support level if you are in a long position (or lower resistance...
This is very true. For me, I have always preferred to stomach the volatility and risk losing a small winner in order to aim for the home run. I typically, just trail my stop up as the trade goes a long and let the market take me out. However, I have noticed that when trading lower time frames in this manner on higher leverage, it is largely impossible. Intraday trends do not last long enough to sufficiently cover the number of losses you incur by having tight stops. Taking profit at levels and/or scaling out is essential to survival when trading this way. Now on overnight trades, on higher time frames, you can go for much larger trends and this works much better that way.
  • #24
  • Jun 30, 2017 6:48am Jun 30, 2017 6:48am
Quoting LDFX
{quote} Nope, loosing 1% 20 times in a row does not give you 8000$ 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$.
This makes sense. Some traders use 1% of the original balance on every trade and some recalculate the 1% after each loss or win. I recalculate. I think it makes your capital draw-down a bit more slowly that way as well as compound it a lot faster when you gain.
  • #25
  • Last Post: Jun 30, 2017 6:54am Jun 30, 2017 6:54am
Quoting medici
There's some information missing to give a well-founded answer - for example, what kind of returns your strategy generates. If, for example, it's a day trading strategy and you clip 50% almost every week, then 20% is ok. If, on the other hand, you trade off a 4 hour chart and do a handful trades a month for 30% return in a year, then, clearly, 20% is unacceptable. So the question should be, which is a personal one, how much drawdown you would tolerate for the return your strategy generates. Further, there is absolutely no evidence-based rule saying...
This is also true. If your strategy has a 90% win rate for example, risking a near 1 or 2 percent of your account per trade makes no sense, since you are extremely unlikely to draw down to a point of needing that many chances. In fact, you are doing yourself a disservice, but risking so little in this case.
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