"Since I started in the business, I have seen a number of traders who ended up committing suicide or being homeless. The one trait they all shared was that they had a gambler’s mentality. When they were losing, they were always looking for that one trade that would make it all back. I learned early on that you can’t do that. This is a business where you have to work. That’s what I do. Every day I make hundreds of transactions. I grind out the returns. If you look at my daily returns, you will see there are very few big up days." - Larry Benedict, Hedge Fund Market Wizards
Best Way To Deal With A Large Drawdown
- Thread starter Fundlord
- Start date
Analyze first every losing trade and try to find out what went wrong for each one.
Or was the loss a result from consistently follow your tradeplan or not? Then your tradeplans should be revised.
Drawdown depends also from leverage, so did you not take a leverage that was too big?
Drawdowns of 18% are not so dramatic. If you sort all registered funds based on drawdown you will be surprised how many of them already had more than 18% DD.
Stay calm, do only what is logical, don't try to make it back in 1 huge trade because it will not work. Work systematically and don't let this drawdown influence your behavior.
Or was the loss a result from consistently follow your tradeplan or not? Then your tradeplans should be revised.
Drawdown depends also from leverage, so did you not take a leverage that was too big?
Drawdowns of 18% are not so dramatic. If you sort all registered funds based on drawdown you will be surprised how many of them already had more than 18% DD.
Stay calm, do only what is logical, don't try to make it back in 1 huge trade because it will not work. Work systematically and don't let this drawdown influence your behavior.
It was over a 30 or so trades losing 20 trades at 2 percent each and winning 10 at 1-2 percent each. Usually my win rate is much higher, i took profits way to early in all the trades and cut losses way too early. Further reducing my win rate.
String of losers, kills your confidence, then your taking smaller than normal profits which don't compensate for your losses, in order to not take another loss.
Win rate, could just be short term not favourable market conditions.
Force yourself to hold longer well, like you should do, longer but smart enough to not let them turn against you.
Win rate, could just be short term not favourable market conditions.
Force yourself to hold longer well, like you should do, longer but smart enough to not let them turn against you.
As other replies mentioned, how big is it compared to your long term backtested drawdowns?
If it has exceeded the expected maxdrawdown by a good margin then you need to shut it off or reduce.
Another rule of thumb is 1.5 times the standard deviation of returns - if the drawdown is deeper than this number then consider switching off or reducing.
If this system is part of a portfolio of uncorrrelated systems then you might just want to keep it going at a reduced allocation as it might be providing smoothing effect for your overall trading plan. I'm a proponent of trading as many uncorrelated systems as you can find, this way an 18% drawdown in a particular system translates to a small drawdown in your overall wealth.
This is how I trade my own strategies, but a different story when I allocate to other managers. My current managers are uncorrelated trading different asset classes but all are drawing down this year ranging from -5% to -20%. I might just fire all of them and trade the assets myself.
If it has exceeded the expected maxdrawdown by a good margin then you need to shut it off or reduce.
Another rule of thumb is 1.5 times the standard deviation of returns - if the drawdown is deeper than this number then consider switching off or reducing.
If this system is part of a portfolio of uncorrrelated systems then you might just want to keep it going at a reduced allocation as it might be providing smoothing effect for your overall trading plan. I'm a proponent of trading as many uncorrelated systems as you can find, this way an 18% drawdown in a particular system translates to a small drawdown in your overall wealth.
This is how I trade my own strategies, but a different story when I allocate to other managers. My current managers are uncorrelated trading different asset classes but all are drawing down this year ranging from -5% to -20%. I might just fire all of them and trade the assets myself.
I just had a deep draw-down this week as well (25%). This is what I plan on doing
1) Reduce size
2) Analyze, analyze, analyze the past 6-7 months and put this week in perspective
3) Come up with new rules / tweek to system and how to enforce them
The first item is immediate. The others will take quite a few days/weeks to work out.
1) Reduce size
2) Analyze, analyze, analyze the past 6-7 months and put this week in perspective
3) Come up with new rules / tweek to system and how to enforce them
The first item is immediate. The others will take quite a few days/weeks to work out.