That may well be, however, I think that if a trading method experiences a 51% drawdown that the upbeat trader may have misplaced confidence issues. Whatever the historical performance of a strategy may be, you cannot hope to finesse it too finely with statistics. At best, statistics is a blunt instrument when trying to predict the future based on the past. Whatever the historical performance or testing may have shown, assuming that a 51% drawdown can ever be "acceptable" is tantamount to playing chicken with the trading gods.
edge test
- Thread starter darkhorse
- Start date
That may well be, however, I think that if a trading method experiences a 51% drawdown that the upbeat trader may have misplaced confidence issues. Whatever the historical performance of a strategy may be, you cannot hope to finesse it too finely with statistics. At best, statistics is a blunt instrument when trying to predict the future based on the past. Whatever the historical performance or testing may have shown, assuming that a 51% drawdown can ever be "acceptable" is tantamount to playing chicken with the trading gods.
However, unless the edge is legitimate, the confidence is misplaced. (Are we talking in circles?
)For me it would be true, but then, I try to be honest with myself. One problem I have with an established edge is thinking it is always present and available for use in trading. Others here have said there are lots of edges in the market, they can't all work all the time. One poster said that he uses an 'ambush' type of trading...waiting for a specific type of trading setup, his edge, and then trading it. That has been for me, a very sharp observation.
No... there are many propositions that don't work in reverse.
Consider the alcoholic statement: if you think you might have a drinking problem, you do.
The opposite statement, "if you don't think you have a drinking problem, you don't," is not necessarily true. There are plenty of alcoholics in denial (just as there are many traders in denial).
Ultimately, "edge" has to be defined by some measurable criteria in the real world.
Or to put it another way, if you were accused of having an edge in court, how would the prosecution prove their case. Saying that you do is not evidence that you actually do, only that you might be delusional.
Not necessarily.
There are private traders who are comfortable with an almost blistering degree of "heat" in their portfolios, to borrow an Ed Seykota term. Seykota himself is one of them.
Let's say you have a five million dollar trading account, and you trade in such a way that you have a 40% annual return expectation over time. Year to year, your annual returns range from +300% to -60%.
Now, if you are down 60% on 50K or 100K, that's trouble. But if you're down 60% on 5 million, you still have 2 million- plenty to readjust your risk percentage and continue to trade with proper contract granularity.
Let's further assume that you have an extra 5 million stashed in safe haven areas, as a backup in case you hit a freak air pocket that is out of line with your worst case scenario.
In this situation, where the trader has more than enough capital to continue operations no matter what, and where he has calculated the odds and is willing to accept occasional 60% drawdowns alongside 300% returns to pursue a 40% long term expectation, there is nothing wrong with being down 51% from time to time. Assuming the trader has an iron stomach lining of course.
I think it's quite possible to be confident and grounded in your edge yet still experience emotional swings. The short term and long term elements operate on different levels.
Kind of like knowing you love your wife no matter what, even when she makes you want to beat your head against the wall...