I see your point. However, your post is confusing for me. Why? Ok. you said " trading is a business of calculated risk/expected reward" and then you said" you will not accept 50k DD on your hypothetical 100k". I can not say the connection..sorry.. because it is just because of the high number " either 50% of your account or 50k" would make this trade unacceptable for you. On other words, Do not you think there is a way of calculated risk/reward couild make 5mi DD on 10mi account acceptable and sometimes favourable?.. Then you said " about 1% DD is accepted risk for you for each trade. Ok...So, if you encounter this 1% DD , you will accept to move this DD " hypothetical loss into real loss.. Ok.. What if you have a streak of 50 losses by the same way.. Each, you will lose 1%. What makes you confident that this will never happen? Statistically based or Backtesting based? or calculated based?.. Please explain to me.. I admit that we are using different defintions here. For me, DD is just hypothetical loss and it does NOT mean anything except that if i liquidate my positions now, then i will lose " real money". So, i do not consider DD is a loss. It might be an opportunity actually. This is my last post in this thread because i could not explain more. Good Luck
For those who say you can't learn from a non-trader (Tharp), that close mindedness will never grant you what you want most in this life. Without the most of us the fewest wouldn't make any $... As far as the title of this tread goes, some of the last books I've read about risk management/position sizing (which are the main variables that will influence drawdowns), the best methods are to use fixed percent risk or a volatility based stop with fixed position size / equity. Of course they back these theories up with testing.
I'm not sure why I'm not making any money, I've done everything exactly according to a book I just read.
I only increase size after a positive p&l series of trades, which means margin allows to trade bigger and accordingly - drop size after a negative p&l series of trades. When you trade well, when you are "in the zone", drawdowns are relatively rare, so this is the best time to increase. On opposite, when something distracts you or you feel out of sync with the market series of losing trades tend to happen more often and it is perfectly logical to decrease trading size for me then. Sometimes, when really feeling wrong or distracted - it's better even to just STOP for the day than struggle and lead yourself to more losses.
Draw down is just that when you acct equity falls. Acct equity is based on total cash and total open trades if they were all liquidated what your final acct value (balance) would be if you decided to close that acct at that moment. If you start out with 100K and when you close the acct only have 50K then that is 50% draw down. If you have 50K in trades and 50K in cash that is 0% DD. As for risking 1% per trade that is NOT a DD because no money has been "lost". I still have my cash and the value of the trade. If the trade moves against me then my acct equity value has diminished. I would NEVER allow my acct equity value to diminish 50% of my original starting equity as that would be stupid. So if I start with 10K and it drops in value to 5K I have lost 50% (ie 50% DD)....which to me is stupid to allow to happen. I am willing to risk up to 6% of my portfolio in all the trades I have but will NOT allow my equity to ever drop to 50%. As for how I know that I will not have this happen,...well it is pretty statistically impossible with the system I am trading which has a 65-70% win rate. The maximum losers in a row is about 3-4 out of every 200 trades. This is based on my own data of my system.
apples and oranges the biggest waste of time on ET system 70% small losers 30% big winnners normal DD 70%
Interesting saying, "The market has no memory." Because it definitely does have one. The market is just a huge mass of people. People who buy and sell are the ones who move the price and their decisions are based on their emotional memory. They hesitate because of the last big loss or jump in head first because of the last win. You and I are part of that big mass of people which means our memories contribute to the price movement as well. It's not a logical memory, but an emotional one which means the memory the market does have is going to lead more to disorder and uncertainty than regularity. The only way to win is to have no memory. Forget the last time this situation led to a massive loss and go ahead and do what your system is saying to do. Don't second guess yourself and go short just because the last time you went long it ended badly or else the price will go up and you'll be wrong again even when your system was right. Then you'll feel extra bad and make another decision based on the memory of that event. Stick to the here and now with no memory of past events and you'll do better. Increasing size during a drawdown is called a Martingale plan and it's a bad idea. It essentially a decision based on the last event. It ties you into the Market's memory and will lead to even bigger and more devestating losses over time. Maybe not this time, but over time.