Archives of “maximum drawdown” tag

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When To Quit

  
  Education
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Whether you are following your own trading system, or following an advisory, newsletter or some other service, if you don’t have an exit plan for discontinuing it, you should.

Why? Studies have shown that when people are under stress, many times they make poor decisions. Certainly if you were losing money with your systems you would be stressed. Consequently, you might make a knee jerk reaction to the losses, or you may stick your head in the sand and avoid a decision all together. Both scenarios can be dangerous. So, the time when you are losing is a bad time to determine when to exit.

Ideally, you already determined when to stop trading when you first decided to trade the system. If not, it is not too late. Just determine the metric(s) that are most important to you. They could include such things as:

• Maximum drawdown

• Consecutive losers in a row

• Amount lost in a week/month/year

• Overall profit after X months

• Overall winning percentage dips below XX %

• Significant break in your personal equity trendline, or equity moving average

• New highs, or breaking of another “good” metric (yes, some people try to quit at the top)

• Anything that can be measured and monitored

The exact condition you select probably is not as important as writing it down and sticking to it. That is the key. It needs to be solid, definitive and written down. Ideally, you’ll also tell your spouse or a friend, too, since it is harder to back out when you make the proclamation public. 

I’ve heard that one money management firm’s exit criteria is 1.5 times the maximum drawdown, and a 24 month commitment. Those aren’t bad, but the best one is the one that you feel comfortable with – one you can stick with.

You’ll definitely worry less about your system’s performance if you write down and follow your exit plan – today!

Dont Take Too Much Risk

  
  Education
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Dont Take Too Much RiskOne of the most devastating mistakes any trader can make is risking too much of  their capital on a single trade. One thing is certain in trading and that is if you lose all your capital you are out of the game. Why risk so much you could be prevented from continuing? There is a saying in poker than going all-in (risking all your chips) works every time but once. This is true of trading.

If you risk all your account on every trade it only takes one loser to wipe you out (and no trading method is 100% accurate), so you will be out of the game at some point it is only a question of time.

In general, we only risk 1-3% of the available capital allocated to a system on any individual trade. This is calculated using the size and, the difference between our entry price and our maximum stop price, and the amount of capital allocated to the system. With the win probability and ratio of size of winning trades to losing trades we are almost certain never to lose all of our trading capital. In fact, the chance of us hitting our maximum drawdown for the year is tiny. (more…)

Dont take too much Risk

  
  Education
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dontakeriskOne of the most devastating mistakes any trader can make is risking too much of their capital on a single trade. One thing is certain in trading and that is if you lose all your capital you are out of the game. Why risk so much you could be prevented from continuing? There is a saying in
poker than going all-in (risking all your chips) works every time but once. This is true of trading.
If you risk all your account on every trade it only takes one loser to wipe you out (and no trading method is 100% accurate), so you will be out of the game at some point it is only a question of time. (more…)

Wisdom of Market Wizards

  
  Education
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“Perhaps the most important rule is to hold on to your winners and cut your losers. Both are equally important. If you don’t stay with your winners, you are not going to be able to pay for the losers.” – Michael Marcus

“The more a price pattern is observed by speculators, the more prone you are to have false signals. The more a market is the product of nonspeculative activity, the greater the significance of technical breakouts.” –Bruce Kovner

My take – Most commons are pennants and flags. And most obvious failed outbreaks are candles ended with the close below the intended trendline.

“The most important rule is to play great defense, not great offense. Everyday I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.”
“… I believe the very best money is to be made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years, I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops. If you are a trend follower trying to catch the profits in the middle of a move, you have to use very wide stops. I’m not comfortable doing that. Also, markets trend only about 15% of the time; the rest of the time they move sideways.”
“Don’t focus on making money; focus on protecting what you have.”
–Paul Tudor Jones (Big Big Big Fund Manager)

“The most important is discipline – I am sure everyone tells you that. Second, you have to have patience; if you have a good trade on, you have to be able to stay with it. Third, you need courafe to go into the market, and courage comes from adequate capitalization. Fifth, you need a strong desire to win.”
“You should have the attitude that if a trade loses, you can handle it without any problem and come back to do the next trade. You can’t let a losing trade get to you emotionally.” – 
Gary Bielfeldt

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