When I started out trading I had the illusion that being a successful trader meant to no longer
have drawdowns or at least on very rare occasions. And I think most traders start out with that
idea in their mind even though they don’t understand what it actually means.
In Trading, you are in a Drawdown anytime you don’t make new equity highs on your account, or if
you have multiple accounts across all of your accounts. That’s not nice and so any trader tries to
minimize these times as making new equity highs is a lot more fun than not doing so.
The problem is that if you try too hard to get rid of Drawdowns you usually get the opposite.
Usually that’s when you’re starting out as a trader and still have the illusion that it’s somehow
possible to avoid drawdowns all together. You end up looking for strategies and ways of trading
where you hardly ever have to take a loss. These can for example be martingale strategies, or
strategies where you have very small profit targets in relation to your stop-loss (if you have
one). These can easily work out for a couple of months, if you’re lucky even longer but at some
point you’ll have a drawdown your account won’t recover from. Or you fall for that trading robot ad
showing you an equity curve that goes up in a perfect 45 degree angle promising you 99% profits. If
you want to know how to build one of these, stay tuned as I’m planning to do a small video showing
you how to do it in one of my new videos, soon.
Back in reality, let’s have a look at why it’s the norm not the exception to be in a drawdown as a
trader. Here’s the equity curve of trading the Ambush All Stars small portfolio (see this page for more details):
Looks really good doesn’t it? If you think it doesn’t, you might still be looking for that holy
grail, so be careful out there!
Still, looking at the stats we’ve been making new equity highs only about 15% of the time. That
means 85% of the time the portfolio was in a Drawdown.
And that’s nothing unusual, you will find about the same numbers on most good strategies if you
look at it over multiple years of trading. In the short term of course this can look different.
During the last 6 months for example, the strategy made new equity highs 44% of the time! But
unfortunately that’s the exception, not the norm.
Sounds terrible? Actually I don’t think so. On the contrary it’s a finding you might want to
celebrate if you’ve been going all crazy during drawdowns in the past. They’re no problem and if
you’re in a drawdown most of the time it doesn’t mean you’re a bad trader or your strategy isn’t
working. It simply is the norm of successful trading in the long run, not the exception!
Just coming back from vacation where we’ve been doing a lot of hiking in the mountains, here’s an
analogy. You’re standing on a peak of a mountain looking at an even higher peak. But to get there
you first have to go down that small valley…no way around it!
It’s the same in trading, so as long as the size of the drawdown is within your expectations, you
can and should relax when you’re in a drawdown. It’s just a necessity you have to endure to get
those profits. So understanding and accepting Drawdowns as part of this business will make your
life as a trader much easier!
Having said that drawdowns are still making me uncomfortable. I don’t like them at all and each
time I’m in a big one I’m having the same doubts and troubles most of you probably have too. But
knowing that actually nothing is wrong helps a lot to make it through these times. Without that
knowledge and understanding, you not only have the doubts but you allow them to win over, follow
them and then probably stop trading at the worst time
All content on AlgoStrats.com is only for educational purposes to show you the type of systematic trades that you may consider once you have learned to trade and analyze the market yourself. It does not constitute investment advice. Marco Mayer & Trading Educators, Inc. will not accept liability for any loss or damage, including but not limited to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
Trading Futures, Trading foreign exchange on margin and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures, foreign exchange and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, foreign exchange, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
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