Aggressive Systems Trading Drawdowns

Discussion in 'Journals' started by Businessman, Nov 5, 2007.

  1. I am starting this journal to share my systems trading drawdowns with the world.

    I believe learning to live through drawdowns is the one of the most important aspects of systems trading, much more than talking about entries and exits etc.
    You can find countless good entries and exits from countless trading books. I am not going to be posting anything related to that kind of stuff or even which markets I trade.

    My ego is not tied to the individual losses I incur in my systems trading (I wish I could say the same about my discretionary trading)

    In this trading account I auto day trade a basket of different futures markets.

    I use very aggressive position sizing, up to 5% of my account per trade and take upto 4 trades a day (depending on how many set ups I get).

    I scale into positions so I don’t always expose myself to 5% loss on each trade, but in theory I could lose 20% of my account in one day. In reality though less than 10 days a year should be losers exceeding 10%.

    I realise some people will think 5% risk per trade is excessive, however as this account is relatively small (less than a million USD) I am willing to be aggressive. And anyway 5% is only used when the account is near its all time highs, when its in drawdown the per trade risk is reduced.

    These money management rules mean I could lose as much as 60% of my account during a worst case drawdown and such an extreme drawdown could last over a year in duration before the account recovers back to its previous peak equity.
    However these extreme drawdowns are statistically unlikely (but not impossible, and actually 100% probable if I trade long enough).

    Simulations predict 95% of drawdowns should be less than 30% from peak equity and 95% of drawdowns should last 3 months or less.

    The account is already up well over 200%, so all future drawdowns are going to come out of profits (the markets money) and wont be as hard to endure as a drawdown in the original starting equity.
  2. Current drawdown :19%, duration: 10 days.
  3. Hi Businessman,

    You seem to have a sound approach to your trading.

    But let me comment on something.

    5% risk per trade is not aggressive. 3% is aggressive.
    5% in my opinion is SUICIDE.

    I certainly hope you have a really good win percentage otherwise a string of losses will easily wipe you out.

    Just as a matter of interest. What is statistically the longest string of losses your system can have?

    Oh and is that 60% drawdown on open equity or closed equity?

    For trend following systems, 60% drawdown on open equity is quite acceptable and part and parcel of the system.

    Also, im curious on what timeframe do you trade?
    eg. 5min bars.

    Best regards,

  4. The per trade win % is 45%. As i trade more than one trade a day on average and the winners are bigger than losers, the daily win rate is 50%.

    As for the 5% risk, that is during winning periods, when im losing the risk is cut down to much less. But im still prepared for 60% drawdowns in my closed equity.. If you read Market Wizards alot of the traders advocate 5% as a maximum risk level, and i use that when the system is doing well.

    In future when my account is much bigger than now (currently its just six figures), but when its seven figures i dont think i could stomach a 60% drawdown. But thats just my personal value system for absolute amounts of money.
  5. Hi Businessman,

    How and when exactly do you increase or decrease your percent risk per trade?

    Dont tell me -- but make sure that YOU know.

    Just keeping the risk at a fixed percent is inherently sound money management because it already means you risk more (in dollar terms) when you are winning so you compound your account quicker, and so you risk less (in dollar terms) when you are losing to decrease risk of ruin.

    60% drawdowns if you can handle it, then its fine.

    But its a big no no if you want to invest money for clients.

    I hope the return/maxDD for your system is acceptable. But unless you are making obscene amounts of money, I don't think it is.

    Just to provide some sort of comparison, in backtesting, my system returned between 31-39%p.a. from in sample and 26-34%p.a. on out of sample data.

    Maximum peak to valley drawdowns in both cases was about 7-10%.

    So return/maxDD in the case of the above system is about 3-3.5.

    So with that in mind, unless you are pulling about 200%p.a., then I would say you are taking on too much risk for the return you are getting.

    In my opinion only.

  6. The CAGR for this system at 5% risk size is 250%.
    That makes the MAR ratio about 4.


    Today the account lost approx 0.5%.

    Current drawdown :19.5%, duration: 11 days.
  7. Well then the risk you are taking is well worth it.

    I must say Im impressed.
    Keep up the good work.
  8. Todays results: -4%

    Current Drawdown: 23.5%, Duration: 12 days.

    This is the deepest drawdown that i have had since March 07.
    This one may exceed 30% but hopefully it wont go much more than that..
  9. Todays results: -3.9%

    Current Drawdown: 27.5%, Duration: 13 days.

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  10. .
    #10     Nov 8, 2007