What is your trading system based on? All reasonable trading strategies, when you strip them down, have an underlying distribution that you bet on. Let me give you an example. Let's assume that I have a RTM strategy. I compute a spread between security A and B and when the spread is larger than some threshold I take a short position. The underlying distribution of my trading strategy is the distribution of the spread. If the distribution of the spread isn't stationary, my strategy will fail. A distribution is stationary when its parameters (mean, std, ..) remain constant in time. (In this particuliar example there are also other required properties of the distribution to guarantee a positive expectancy betting strategy). Ninna
There are only two trading reasons to stop using a system. The first is if the system is no longer going to produce adequate returns at acceptable risk. The second is if current conditions are hostile to the system, but normal conditions will return. In the first case, the system needs to be abandoned entirely. In the second case, the system should be stopped until conditions are no longer hostile. The drawdown one has suffered is not necessarily a sign that a system is obsolete (although it may be). It may simply be a sign that recent conditions were hostile, or that one was taking too much risk. Thus just having a drawdown is insufficient reason to stop trading a system, although it is a good reason to scale back size and reexamine it closely. The only reason to stop and then restart, therefore, is if current conditions are hostile or near-term conditions seem more than likely to be hostile. This makes it obvious when to restart trading the system - when current or near-term conditions no longer seem likely to be hostile. Monroe Trout's rule is a lazy, arbitrary fudge with some usefulness but open to improvement. There is no reason to think that hostile conditions will automatically cease at month end, for example. Still, it's better to be lazy on the side of caution than risk. There may be reasons to think that a 10% intra-month drawdown signals dangerous conditions ahead. The question is whether one can identify likely near-term hostile conditions. If not, then arguably one should just keep on trading regardless, so long as drawdown has not exceeded Monte Carlo maximums by more than about 50% (e.g. if your testing said 20% max drawdown, then once you are down 30% it's a red flag).
Managers of OPM need earwash for clients such as "we'll stop and reevaluate if we're down X% in a month," whereas independent traders are free to make optimal decisions, given the facts available.
I find this interesting ,sure it will make u miss some opportunities but still , i find it interesting !