Following the system

The hardest part for a new trader is to follow the system despite drawdowns and every system has one.

William eckhardt co-founder of turtle trading fame said:

"That's right.Your job is to follow the system.If the system does something that results in losses.that's just an expected part of it.
Your judgement might be on line over the entire performance of your system, but there's no sense in which your judgement is on line on any single trade"

Though I haven't started any live trades yet, the fear of walking away from a system cause of huge drawdowns is there. any of you guys offer any advice on how to overcome this?

Yep, it is really quite easy. I am assuming that you have a well defined, documented backtested trading system and you are comfortable with the results. You need to place a stop loss on your trading system. When you place a trade, you don't exit until the stop loss is hit when you are in a losing position, so you do the same thing with your system. If your system has a max historical drawdown in the last 5-10 years of say 15%, then you simply place a stop loss on your system say 1.5 x your maximum drawdown, 22.5%. If you get a 22.5% drawdown from an equity high, your throw the system away and start again. If you have a 20% drawdown, you keep going.

Simple.

Simon

I think Dr Rock's assumption that you have a system whose results you are comfortable with is a very important one. Once you are comfortable with your risk parameters and your expected and worst case drawdown scenario's, you have a benchmark to compare against.

If you suffer a huge drawdown, this may because your system is chasing high returns and is therefore likely to be more risky in nature. This is why you need to have a drawdown 'expectation' in mind. In my view, the 'hugeness' of the drawdown should only influence you decision to walk away if it is over an above your expectation. Its understandable to feel emotionally down when you approach this line-in-the sand (risk of ruin).

If you don't have these risk parameters set up in your mind (preferably on paper) there is a risk of closing up shop too soon and you won't know when your system or approach needs tweaking or modifying.

Confidence in your system is CRUCIAL. Otherwise you'll lack the discipline to follow it properly.

That's why it's so important to have profitably traded your system for long months over a demo account before going live, so you KNOW that it works if religiously followed. More over, it is also equally important to have a sound money managment rules set, so no matter what happens you only risk a small % of your account.

Those two factors will cut stress down to healthy levels

As a new trader that has just recently gone live, might I say that following your system is very important. It give you focus and teaches one disepline and pactience. These 2 things I feel is what makes a successful trader successful and non-successful traders fail. When I follow my system I do well. Do I take losses of course, that is part of the game. When I stray from my system I almost always take a loss. I still lack some disepline and pactience. I am alway wanting to get in a trade. Somethings I see movement in the chart and I get all excited. My system says no by emotions say yes. My system is almost always right. My system say no I need to trust in that other wise what is the point of having a system is one is not willing to follow it.

My 2 pips worth :}

Fdisk

..just wanted to bring up a thread form 5 years ago..see how it goes.. :-)

Nice