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Maximum drawdown
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Maximum drawdown

  #1 (permalink)
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Maximum drawdown

What should your maximum drawdown be? Should it be:
  1. fixed dollar amount per day (example: $500 dollars lost in one day)
  2. percentage of net profits over a period (example: not more than 10% of net profit over 100 trades)
  3. fixed dollar amount per contract times fixed number of acceptable consecutive losing trades (example: $200 per contract and 10 losing trades)

etc. I am not saying any of these are right or wrong and it is certainly not a complete list. Some make much more sense to me than others. I'm curious as to what fellow traders are using to determine what an acceptable drawdown amount is within their strategies whether it's automated strategy or discretionary strategy.

please share! what method do you use? in particular, I prefer using the percentage of net profits over a certain period whether that period is in trades or in time. I want to see no more than 10% drawdown over 100 trades or 10% over 30 days relative to the net profit. But this is sometimes extremely hard for me to accomplish and I wonder if I am being too inflexible and should allow a larger margin of error?

"Let us be thankful for the fools. But for them the rest of us could not succeed." - Mark Twain

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  #2 (permalink)
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2 Loooser in a row in a special pattern makes me stop trading this setup for this day.
it shows me that its not its day. i am not trading for big homeruns - so a third one of this kind - if its a winner - could not pay everything back i lost before.

the 2 loooser in a row also bring me down mentaly - i am not at my needed 100% focus anymore - with this feeling i stop these trades.

yes - its an emotional stuff then, but i have lots of experience on how my mind works + know myself good in these situations.

max-td

Last edited by max-td; July 31st, 2009 at 06:46 AM.
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  #3 (permalink)
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I measure draw down in terms of mental clarity not points or dollars. When my mental clarity is drawn down to the point I'm thinking more about my "mistakes" or "past actions" than thinking about what is currently going on and the next opportunity, then it's time for me to put myself on pause. This may happen in a day or over the course of months, you never know.

If I'm comfortable with myself and the trades I have taken regardless of outcome, then I have no problem continuing. A baseball team can have a 69.5 winning % but during the course of the year they could have a couple losing streaks of 8 or 9 in row. It's a possibility that it could happen so you have to be comfortable with that going in to the situation.

Now all this applies if you have shown success over a period of time, if you are still "looking" for your style, trading plan or whatever, then cap it at a fixed % of your BR.
You lose 5% or 6% in a day, pack it up and fight another day.

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I've thought quite a bit about this recently, because I was given the good advice to think first and foremost about the daily losses I would be happy accepting.

The conclusion I've come to is that for me I need two types of drawdown triggers.

The first is % based, and really just follows Elders guidelines.

Each trade has a max risk of 0.5% of my capital. 1.5% loss per day is my max daily loss. A 6% drawdown on my monthly starting capital means no trades until the next month.

The second is mental, and is designed to avoid me continuing to trade when I'm not 'seeing' the market. If I take two losing trades in a row on a day (1% down at this point), I write up my losing trades and then ask myself if I'm happy continuing for the day. Could be I'm tired, or stressed, or in a hurry, etc. If I'm not happy I stop.

Since I'm just starting out I can't be 100% sure this will work, but in SIM trading it has helped my results greatly. My aim is to review this approach each month and tweak it where necessary.

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Moondialman View Post
I've thought quite a bit about this recently, because I was given the good advice to think first and foremost about the daily losses I would be happy accepting.

The conclusion I've come to is that for me I need two types of drawdown triggers.

The first is % based, and really just follows Elders guidelines.

Each trade has a max risk of 0.5% of my capital. 1.5% loss per day is my max daily loss. A 6% drawdown on my monthly starting capital means no trades until the next month.

The second is mental, and is designed to avoid me continuing to trade when I'm not 'seeing' the market. If I take two losing trades in a row on a day (1% down at this point), I write up my losing trades and then ask myself if I'm happy continuing for the day. Could be I'm tired, or stressed, or in a hurry, etc. If I'm not happy I stop.

Since I'm just starting out I can't be 100% sure this will work, but in SIM trading it has helped my results greatly. My aim is to review this approach each month and tweak it where necessary.

it will work very well if you actually do it. majority of traders have good signals, good systems, good plans and then throw everything out the window when they go from sim to cash. then they learn from pain a bit and try again. they do well again for a short while and then an event happens and they once again toss their rules, plans, systems out the window.

so follow it no matter what, and you will be in great shape. your plan is straightforward and not overly complex. that is key. a complex plan is a plan that is impossible to follow and full of loopholes that you'll try to exploit later. keep it simple.

good job with the info. i will take a look at monthly drawdown as a percentage and see if anything comes to mind in my own trading.

"Let us be thankful for the fools. But for them the rest of us could not succeed." - Mark Twain

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It would be interesting to know what your live results show for drawdowns, and whether you find a % based approach, or an absolute figure works best.

The reason for asking is that my gut tells me there is another twist to this.

Supposed my live account compounds steadily, but I'm still following my max drawdown % rules. My feeling is that at some point, although I'm within my max drawdown %, the actual value of my drawdown will start to affect me. If I was guessing now I'd say the value would be around the $500 / day mark, but really I have no idea until I get to it.

So my plan was to be prepared to switch from a using % based approach to an absolute daily value for my max drawdowns. Since I'm looking for steady capital growth and a small income stream from my trading fund, reducing the risk / day over time seems appropriate too.

If horror of horrors my trading fund shrank, then it may be necessary to move back to a % based approach at some point. Hence the placeholder for a monthly review / check of my journal thoughts etc.

Odd really when you think about it, if you had a choice you'd start with plenty of capital and not risk very much of it on each trade. What actually happens to most folks I would guess, is precisely the opposite.

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  #7 (permalink)
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my max drawdown is 10 % of an account == 10 trades. what i mean i have 10 loosing trades in a series with 1% risk. happend this, something is wrong and i would see, where are my errors ... on mind or plan. and we know, the problem is "my" mind ...

the second importend step is: never mixed a trading/scalping plan one an account.

with this i ever had a max drawdown of 5 - 7 % of an account.

i follow the r-rule and charles le beau. he said buy/sell only on closed high[1] and low[1] or better on HH, LL, HL or LH. so i work only with stopp orders.

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i have crashed some real and sim acc. with click orders. this orders i can not handle. my mind will blend me.

best regards
wh

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