Best Way To Deal With A Large Drawdown

[loyek590]

put in on in your paper account until you are sure you have a winning strategy
then go live until you go into a big drawdown
evaluate your strategy and realize it was not as good as you thought and if you just continue you could lose everything
get flat and go back to paper until you start making money again
then go back live (only with a much smaller account now due to the drawdown)
and just keep doing this over and over

that's how most deal with drawdown

 

[loyek590]

no strategy you can come up with when you are flat and of sound mind and body is so bad it will destroy you if you just stay with it. It may not make you money, but it will get you back close to even. And that's the time to get flat and re evaluate if the strategy exceeded your expected drawdown.

happens to me all the time...I like the strategy but I don't like the drawdown

and that means I need to give up some profit potential in exchange for less drawdown

but don't give up on the strategy in the depths of drawdown when it looks like even g-d is mad at you for gambling.

hard enough to dig yourself out of the hole you are in without now trying to dig yourself out of a new hole with even a less starting balance

 

[SwingToWin]

Obviously always better to be trading smaller amounts while losing, but larger while winning but...........

As you don't now when you will get a string of losers or winners and your generally playing for winners, this makes above totally stupid.

And if you reduce size after a few losers, it just takes longer to make it back.

I trade near the limit of my 50:1 margin, which i reduced that way my lot size follows my account size closely.

I'm sure he meant to use a smaller size on all (!) trades, not just after a drawdown.

 

[loyek590]

hard to dig yourself out of a hole with a smaller shovel than you used to dig the hole

 

[loyek590]

a lot of gamblers get in a drawdown and throw in the towel and think somehow, even though other than a few lucky trades have never in the past "beat the system", that somehow they are next time going to beat the "system."

that's why I say don't try to beat the "system."

learn how to become part of the system, then everyone will be trying to beat you

 

[Redneck]

hard to dig yourself out of a hole with a smaller shovel than you used to dig the hole

No doubt

Yet..., continue using the same shovel..., or even a bigger one - and the underlying reason for the draw down in the first place..., not resolved

The hole gets exponentially deeper..., exponentially quicker (the classic ; hey I'm headed straight into a brick wall / freight train..., off a steep cliff/ into oblivion - cool.., let's speed up)

It a shit sandwich either way

============================

Correctly managing our core trading (risk..., risk..., risk) - excessive draw downs should never happen

Or if you prefer - should never be allowed to happen

This accountability falls directly on the trader

RN

 

[loyek590]

No doubt

Yet..., continue using the same shovel..., or even a bigger one - and the underlying reason for the draw down in the first place..., not resolved

The hole gets exponentially deeper..., exponentially quicker (the classic ; hey I'm headed straight into a brick wall / freight train..., off a steep cliff/ into oblivion - cool.., let's speed up)

It a shit sandwich either way

============================

Correctly managing our core trading (risk..., risk..., risk) - excessive draw downs should never happen

Or if you prefer - should never be allowed to happen

This accountability falls directly on the trader

RN

well said, but the problem arises when your projected max drawdown is 30%, and that is over time, and you hope to have a few winners under your belt before it hits, and it hits on the very first trade!

Then what do you do?

I say stick with the system, you already have a loss prevention program in that was well thought out before all this bad stuff started happening to you.

 

[loyek590]

in the long term, whether you know it or not, your max drawdown is 100%, and you will someday hit that if you keep doing what you are doing.

some call it "risk of ruin." And other than Martingaling with an unlimited amount of money, I have never come up with a strategy that doesn't have a "risk of ruin", and Steven Hawking will tell you that given enough time all possibilities will be hit.

So the only question is, how much time do you have?

 

[Redneck]

well said, but the problem arises when your projected max drawdown is 30%, and that is over time, and you hope to have a few winners under your belt before it hits, and it hits on the very first trade!

Then what do you do?

I say stick with the system, you already have a loss prevention program in that was well thought out before all this bad stuff started happening to you.

L590

First - Thank You Sir for the civil conservation - they all too often are missing around here


So let's break this down

you already have a loss prevention program in that was well thought out before all this bad stuff started happening to you.

This is a must - but did in fact the OP have this in place - he hasn't said.., we don't know

And your quote is the exact reason an excessive draw down should never occur in the first place - before that point..., warning bells / red flags/ dogs howling / PnL - should be sounding out loudly - STOP / reassess / correct!!!!!!

=============

Then what do you do?

I'm referring to manual traders when I write this

Why do excessive draw downs occur

System failure (trading platform) - with no disaster stop in place..., or trader did not call the broker and immediately dump the position

Mkt evolved - and trader's approach no longer effective in current environment

Something inside the trader changed - and is no longer able to systematic apply his/ her approach / method

Mkt shot up / tanked - and trader did not exit (essentially froze)

Any other cause(s) I'm missing?


Regardless - none of the above are out of the trader's control to properly manage..., or correct and get back on track


Your thoughts Sir

Thx
RN

 

[loyek590]

L590

First - Thank You Sir for the civil conservation - they all too often are missing around here


So let's break this down



This is a must - but did in fact the OP have this in place - he hasn't said.., we don't know

And your quote is the exact reason an excessive draw down should never occur in the first place - before that point..., warning bells / red flags/ dogs howling / PnL - should be sounding out loudly - STOP / reassess / correct!!!!!!

=============




I'm referring to manual traders when I write this

Why do excessive draw downs occur

System failure (trading platform) - with no disaster stop in place..., or trader did not call the broker and immediately dump the position

Mkt evolved - and trader's approach no longer effective in current environment

Something inside the trader changed - and is no longer able to systematic apply his/ her approach / method

Mkt shot up / tanked - and trader did not exit (essentially froze)

Any other cause(s) I'm missing?


Regardless - none of the above are out of the trader's control to properly manage..., or correct and get back on track


Your thoughts Sir

Thx
RN

well, some of us think we had a max loss program in place, but there was something we didn't quite see, even though it was sitting right there in front of us.

then it's a matter of trusting how you saw the world when you were flat and relatively sane, or how you see it now in the depths of drawdown?