one reason traders lose is changing strats during a drawdown. Think about it, trade what works until drawdown is too severe and then stop and try something else. How's that going to work over time? If it's an ok strat at least wait until you get close to even then get flat and think about it. No strategy you ever came up with will wipe you out. Most of them will break even minus commission and the spread. But switching at the bottom (if you do it often enough) could possibly wipe you out.
October last year. USDA reports always come in when markets are closed. CME's trying to get them to change that. This year hasn't exactly been quiet. USDA has gone limit up/down a few times... even NYMEX was briefly limit down in May this year, when heating oil hit its daily limit (causing ALL energies to shut down for 5 min). To put it mildly, I've had a lot of opportunity to test my risk management techniques this year.
Wow...even Nymex got limit down, it means something like 10k$ move right? I remember the grain limit last year because I was at the CBOT at that time and the currency guy in my room was like" Hey(Me) are you ok? Damn...Everything is locked". I had no position.
Heating oil moved $0.25 in early May, so caused the lock-up... crude was close to moving $10. About a 10% move in each case. (DOWN, not up.) Yea, if another USDA report comes in like last year... I'll still be down, but with my new risk management approach, (hopefully) no worse than a drop of 4-5%. I remember sitting there looking at my numbers last Oct even before the open, trying to figure out what my losses would be... and I kept staring at the calculator going *no*, that can't be right. Just horrifying. Didn't know who to talk to. At least my kids still loved me! I'll probably be there again some day. Just gotta remember what doesn't kill you only makes you stronger.
They will always.Have you ever run a simulation on a 87-like event based on the average current volatility? This would be bloody.
What's there to simulate? You can't simulate the spreads. A true melt down would just be like the Flash crash... total chaos. For me, I try to manage my risk by keeping my positions within 1 standard deviation. Nothing far OTM. A huge move in either direction, I hedge with the underlying, and I'm (hopefully) done. Losses will be severe, but at least I'm not dealing with the obscene optionality of the real OTM stuff.
We are on the same page. Option sellers and liquidity providers can get killed in Taleb-like events. I would be interested to know the number of ZB-ZN-ZF scalpers that would survive a surprise rate cut of the fed like in 2001. I have the habit of always calculating on each instrument what would be my max loss if it goes straight limit up/down through my size...That why I like more and more to trade calendar spreads, less price shocks...
I finally have my best day bigger than my worst again. It took me more than 3 years but now my best is around 1.5 times my worst. What is weird is it didn't come from a particular event on one market, but just from all my trading going the right way...Scalping, curve trading, long term seasonal trades... I perhaps got a little help from CME "inventive" settlements too, I don't know...
Congrats either way, I am consistent but my worst days is like 2 to 1 to profitable. I don't know of many who's profitable days are bigger than worst days. I average down when I day trade, so if losses happen early in day before my Goal is made where I reduce contract size, losses are staggering and when I get three losses in a row, oh boy it is mucho. But stats and backtesting shows for me that's way to go and have done so for past four years. I don't include the long term trading cause gets complicated with rollovers, commodity trade might take four years to play itself out. Sixteen years ago I switched to percentages from money, then it doesn't seem as bad when I have bigger losses. Just playing the game, but it still exciting, been up all night testing out new idea, didn't even get sleepy, that's when you know you onto something interesting.
That's the problem with scalping/liquidity Providing/mean reversion, you are always short gamma in the end so losses can be terrible sometimes( swiss franc black swan is the worst example I have seen ). I prefer to concentrate on my short term curve/seasonals plays now.