Discussion in 'Risk Management' started by turkeyneck, Feb 25, 2011.
At what drawdown % would you get out of everything, go 100% cash and get a start fresh?
1%..... Start fresh next day.
All depends on what your goals are and what kind of trading/investing your doing.
We use 20% as the limit when to abandon a strategy.
Since we size using LSP (Ralph Vince's method) we actually use 10% risk of hitting 20% drawdown in the next year as the risk level. This is based on the assumption that future returns will be same as walk-forward and real trading results. This assumption is obviously an additional risk.
One benefit with LSP is that it provides a objective and controlled way of shutting down a strategy that stops working. Of course there's still the risk of not being able to scale out in time (e.g. overnight risk) which needs to be addressed separately.
Here we monitor the returns constantly on several timeframes and we stop the strategy when the returns fall outside the statistical bounds (both better or worse). It happens very rarely however.
If I'm simply long calls or puts, I've backtested that if you see it decline 50%, you're almost always wishing upon a star that it will come back. 30% is another good waypoint. You really shouldn't be going down much if it's going to be good. 10% is no big deal as it comes with spreads and maybe 1-2% slippage from your equivalent stock entry.
For stocks, a 2% starts to concern me a little, but I wouldn't leave until 5%. I position trade for a minimum 10% gain and trade options only for doubles btw, I'm not a daytrader.
On an account, 20% is a good area to pack it in and re-up. It takes so much good work to rebuild from drawdowns of more than that. It's not worth it even if it that position comes back. A couple of those and you need to achieve a double to get your account flat.
At 20% per strategy or 10% for my overall portfolio I would take a closer look at my performance and the market environment. At this point I might scale back but not to 0. The book Trading Risk by Grant is very good and very relevant to this question.
Sometimes when my acct hits 0. Other times I'll wait for the margin call.
1/12th of your acct per month,that will keep you in the game for 12 months,once your up only risk the monthly avg profit,your acct should keep growing
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