Drawdown Monte Carlo Increase over time PROBLEM | Traders Hideout


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Drawdown Monte Carlo Increase over time PROBLEM

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Legendary Market Wizard
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I am afraid this might be a sad reality of trading systems.

And you might find those University books on Monte Carlo more useful than you wished for... There is no way to do a correct analysis of system performance and robustness without them!!

Ok lets drill in a bit then:
Step ONE
To design and backtest a system that survives in the market(s) is not trivial. Many traders want to see the automated,
semi-automated or manual (upon upcoming signal) system work in ANY market at ANY time.
This is the crucial point - as one fellow poster here said "Know Thy Market" you need to specify a system on the specialty
of exactly this one.
Now coming to the time BEING in the market and the time STAYING at the sideline:
To avoid any big draw down you need to exactly define for a system WHEN to NOT enter.
Sounds easy? It isn't!
The most errors are made by entering the market under circumstances to do not so.

Step TWO
When you can define to squeeze points out of the market when several conditions in your model are true then you can
get results and note them for the Monte Carlo test. You may see that your tests still bring negative results. If I understand
your words right then you see still a dripping account to limes zero...

Step THREE
Even knowing your entries and exits you need to define your hard stop. To prevent losses or large losses in your account
or even wiping this out. That step seems to be the most important:
You need to filter out NOISE and to stay in the game at the "edge" of normal movements to get your positive points out
of the market.
That means backtesting and even more test under normal market conditions.
You may find the optimized hard stop for a given trade - even with some exceptions for special situations. I am speaking
from patterns that occur.

Once found that optimum one can trigger the system and see the outcome under market conditions in the bay of sharks.

To sum it up:
A trading system needs to be stable with positive results in the long run. This means to find the moments when NOT to
trade to avoid in shaky markets some draw down which could be eventually foreseen.
Once the system presses some points out when conditions are "good" then it survives.
Finally it does NOT matter the quantity of trades but the QUALITY. Think about!

Hope this helps
GFIs1
who recommends to read the "realtime" (system) journals on FIO that show trading results that are consistent.

PS: one last word on the economics of any given market from an economy point view:

If there are losers there must be winners - to balance it all...

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