If you have two automated systems, both with max drawdown of 50%, and you have a perfect 0 correlation, if you double up and trade them with a 2:1 leverage what are the chances of you blowing out your account statistically?
Chances of Negative 100%?
- Thread starter EliteTraderNYC
- Start date
what's the probability of seeing the 50% drawdown for each strategy?
100%.
By gamblers ruin.
Lets say there is a 10% chance of a 50% drawdown in each system. 50% is also the max drawdown.
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Its not the leveraged ] derivatives or stocks that are a real killer, it's much more the leverage/insane leverage]
One of he highest probabilitys of fatal flaws in your system ;
even if it has been a'' perfect o correlation'','' is its not likely to be perfect o correlation, in the future''Frankly you scenerio sounds too risky long term, short medium term it maybe thrilling, profitable.
This last bit of wisdom may not mean much to you no.;
But even if you saw someone make +/ 1 $ million , on a swing/position trade or a marker day trade, but most traders/management noted it was with insane leverage.
I wouldnt care how often he did that............But Some may appear to to be abusing leverage, but thier total amount risked is such a small %, it works well , even over long periods.
They can blow at once, 50% + 50% with low probability of 1% (0.1 x 0.1) or the first may blow and after a while the second will blow in which case the probability is 100% if you trade long enough.
Let p be the probability that system A does not blow and then B does not blow, with p < 1. Then as n goes to infinity the probability that the systems do not blow p^n goes to 0 and they blow with probability 1.