Up 55% or so for the year. Currently in 7 single lot positions (with 1 being a double). Profitable in all except 1 - that one has a $12 loss right now. Equity chart at the very bottom.
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Here is the next installment in "The Trading Process" series...
The Trading Process - Drawdown
Last time, I discussed that as part of your Trading Plan, you need to determine your goal for rate of return. That is a pretty easy one, and pretty enjoyable too!
Determining the drawdown you can endure is just as important, but not as enjoyable. Drawdown is the amount your account falls from an equity peak. Step 3 in the trading process is determining the amount of drawdown you can handle.
For drawdown, you simply need to determine how much money (or what percentage) of your account you could afford to lose. You might also want to attach a time limit to it. For example, "I want a strategy that has no worse that 25% drawdown, and that drawdown cannot last more than 3 months."
With a goal like that, you have something to measure any strategy you develop against.
A couple of pointers:
1) If you develop a system by backtesting, your actual real life drawdown will almost always be worse than your backtest. So, if you backtest says 10% maximum drawdown, count on at least 15-20% maximum drawdown.
2) If you think you can endure 50% drawdown, in reality you probably can only endure 25%. This is a working theory I have, based on discussions with many traders. My "Expert Council" (more on them in a future post) agreed with this idea.
EXAMPLE: For the contest, I decided on an "all or nothing" approach. I decided that I would trade this account until/if I had an 80% drawdown. I don't use this large a drawdown in my "normal" trading, but 80% fits this particular purpose. And I can live with it. That is key - make sure you can live with whatever you decide.
Next time: some more trading plan objectives that you should have.
Hi Kevin,
ReplyDeleteOn the Contest:
Big congrats on your YTD performance and getting back into top standings!
On the Trading Process/ Drawdown:
- By attaching a time limit do you mean duration of drawdown regardless of how deep it goes? So - using your example - would you quit if maximum drawdown was only -5%, but equity did recover its most recent high in 3 months?
- Would you always use % drawdown as opposed to a fixed dollar value (e.g. maximum historical DD)?
- Just out of interest what was the maximum historical DD of your contest system?
Thank you,
Vlad
Thanks for the questions, Vlad.
ReplyDelete1. There is no "right" answer to this question. Personally, I rely more on % drawdwon, rather than time duration. But, it may be that a system with a 6 month drawdown may be too much, even if it is small. So, if you include time criteria, you can look at historical results to check if your system passes.
2. Just be consistent. If your backtest is based on 1 contract, and shows drawdowns in $, that's what I would use as criteria. Don't mix.
3. The contest system had at least a $16,000 drawdown, just based on closed trades. It may have been even more for daily returns of open and closed positions. Some people say this is a bad system because of this drawdown. Starting with $10K, though, you can easily see that blowing out the account is entirely possible.
Seeing all these questions on trading, leads me to think of a question for you.
ReplyDeleteQuestion: Read somewhere that says woman is the hardest thing to figure out in the world. So, between woman and trading, which one do you think is harder to figure out or the same?
lol. Maybe woman makes the best traders.
Great Question! If I answer "trading is easier to figure out" the market will likely serve me up a huge drawdown, thus proving me wrong. If I answer "women are easier to figure out" I'll get in trouble of another sort...
ReplyDeleteSo, I'll have to pass on giving an answer!
In many of the trading seminars that I have attended locally, I hardly see any female traders at all. Have you met any good ones? Or is trading male dominated?
ReplyDeleteI've talked to a few online. But yes, mostly male dominated.
ReplyDeleteI follow one female trader featured in Market Wizards series. Hint: she wrote a really great trading book. Guess who she is?
DeleteLinda Bradford Raschke - LBR Group, www.lbrgroup.com
ReplyDeleteSpot on!
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