Worst Scenario?

Discussion in 'Risk Management' started by feng456, Jun 9, 2011.

  1. feng456


    Hi guys I am seeking your opinions on how to plan for worst scenario in regards to losses.

    Say I backtested my system and the worst drawdown during that period was -$1000 (per quarter). Assuming my testing to be correct and results valid, what kind of drawdown should I plan for when actually live trading?

    p.s. I dont consider events such as the flash crash as valid seeing how they are too infrequent. I am looking for reasonable protection not protection against every possible thing.

    Thanks in advance.
  2. feng456


    come on guys some help please?
  3. tradermn


    The answer to your question depends on many variables. Are you asking how bad can a single trade go? I guess IF you were trading stocks it's safe to assume a stock could be up or down as much as 10% any given day. But if you are trading options then it's a different answer, futures is a different answer. It depends on how much leverage you are using.

    You need to be much more specific if you want answers from the crowd.
  4. I disagree that you could assume a stock will only go down "as much as 10% any given day". Sino forest ring any bells? Down 63% after fraud allegations? The black swan is out there. No backtesting can prevent it from occurring. The only thing you can do is diversify and/or hedge w/ puts.
  5. m22au


    63% is a small decline.

    A stock could be halted (have a look at the Chinese RTOs on the halt list) and then open on the pink sheets down by over 90%
  6. tradermn


    Read the original post, he said:

    "p.s. I dont consider events such as the flash crash as valid seeing how they are too infrequent. I am looking for reasonable protection not protection against every possible thing."

    He doesn't want to know about black swans, he wants to know about typical daily fluctuations.
  7. NoDoji


    If you ran series' of computerized backtests for a given strategy, your real-time trading results will most likely be VERY different. I don't know why this is, but it's held true for every strategy we backtested, then ran in simulation using live data during the trading day.

    It was only after I completed a couple months of daily manual backtesting and collated all the detailed results in a spreadsheet that I was able to develop some strategies whose results on paper came closer to the results in simulation.

    Because of this I would recommend taking the time to conduct detailed market analysis to develop your strategies, rather than running those automated backtests you can pump out in a few minutes. For some reason those results always indicated we'd be multimillionaires in less than a year.

    Now, once you find something that provides consistency in simulation over time through varying market conditions, your live results should be similar to the simulated results, assuming the demo account(s) you used for testing provided accurate data, and your trading is automated. There may be minor discrepancies related to slippage, but the overall result between sim and live should be very close.

    If you're planning to trade discretionary, that's a different story. Despite the most meticulous back-testing and subsequent consistent positive sim trading results, most traders quickly discover major glitches in the limbic system which cause their live results to bear no resemblance whatsoever to the tested and simulated results :eek: