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Idea to Decrease Drawdowns
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Idea to Decrease Drawdowns

  #1 (permalink)
Trading for Fun
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Idea to Decrease Drawdowns

So, I have developed a trading strategy which shows consistent profitability in Live Sim for over 6 months now. 'Problem' is, some weeks are inevitably not so good which is expected with any strategy/trading plan.

There is no holy grail strategy which makes guaranteed profit every week. Markets change day to day, week to week, month to month. Markets are dynamic.

To be a trader, means accepting loss and managing risk, as a prerequisite to making profit. You can not have profit without loss/risk in trading.

So, I have been thinking about how I could minimise my drawdowns and therefore increase my overall profit. There is one idea that I would like to share with you, which can theoretically be applied to any strategy!

It is quite simple really. This will work if you already have a strategy running for a few months at least for enough data to analyse. I will tell you how I am thinking of incorporating this idea:

I have a strategy, it will run on simulation. Once the strategy reaches a certain amount of drawdown, I will start the strategy in my Live Account and leave it running for a certain period of time.

Now, the idea behind this is that every strategy has a drawdown. After the drawdown, every strategy makes profit (the lowest point of a drawdown is when things start to go up again). For example, you may look at your results and see that the max drawdown was $2000. You may see that your strategy typically recovers after an average drawdown of $1500. So this is what you do: Run your strategy in live simulation. Once the strategy reaches a typical drawdown, that is when you begin the strategy in your live account.

So what you are doing is cutting out some of the drawdown in your live account, AND beginning your strategy at a typical time that it will recover, meaning higher probability trades!

Note: This is just an idea that I thought was worth sharing. I know there are some faults and I am not saying this will definitely work, but as long as it gets people thinking and adds to the community, I'm happy.

Thanks, and would appreciate feedback!

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  #3 (permalink)
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Big Mike View Post
Watch all the webinars on futures.io (formerly BMT) from Kevin Davey and on algorithmic trading strategies. It's been covered in-depth.

Mike

Do you have a link? Or is this only for Elite Members?

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  #5 (permalink)
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well as regards my experience, every time I tryed to overperform my strategies I ended in underperforming it, so I don't try it anymore. You have to take the good and the bad, if you wait for a drawdown to come you might loose some very good results and when drawdown eventually come you might just take only a loosing series of trades.

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nourozi View Post
Do you have a link? Or is this only for Elite Members?

I've spent over 1,000 hours putting these webinars together for members. I would hope you could spend one or two minutes, click the big button on the top of every page that says 'Webinars', and go from there on your own without me giving you links.

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  #7 (permalink)
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The best way to limit your drawdown is by looking for trading opportunties that offer positive expectancy. The idea described in your first post is a fallacy. It's like the gambler who bets on Red after seeing a series of Black thinking his chance will turn but forgetting the fact his expectancy to win is just shy of 50% on every bet.

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you could try using a giveback rule, like say you are up a certain amount of money 2 hours after the open once you are down 30% of your intraday equity you stop trading. This is something Mike Bellafiore of SMB capital (NY equities prop firm) advocates and according to him it helps improve his traders p/l over the long run. Another thing the guys there do is look at p/l during certain times of the day, for example a lot of traders are net negative during lunch hours so an adaptation is to trade less frequently and with less size to combat this. Also, they identify the trade setups that offer the best risk/reward and probability of working and they increase their size on these.

Understanding yourself is just as important as understanding markets.
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When testing a strategy for tradeability, do not only look at the expectancy, but also take into account the dispersion of the results. Calculate the standard deviation of all trades.

Any strategy with a small standard deviation should beat a strategy with a large standard deviation. Lower dispersion of results allows you to increase leverage for an equal risk of ruin.

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nourozi View Post
So, I have developed a trading strategy which shows consistent profitability in Live Sim for over 6 months now. 'Problem' is, some weeks are inevitably not so good which is expected with any strategy/trading plan.

There is no holy grail strategy which makes guaranteed profit every week. Markets change day to day, week to week, month to month. Markets are dynamic.

To be a trader, means accepting loss and managing risk, as a prerequisite to making profit. You can not have profit without loss/risk in trading.

So, I have been thinking about how I could minimise my drawdowns and therefore increase my overall profit. There is one idea that I would like to share with you, which can theoretically be applied to any strategy!

It is quite simple really. This will work if you already have a strategy running for a few months at least for enough data to analyse. I will tell you how I am thinking of incorporating this idea:

I have a strategy, it will run on simulation. Once the strategy reaches a certain amount of drawdown, I will start the strategy in my Live Account and leave it running for a certain period of time.

Now, the idea behind this is that every strategy has a drawdown. After the drawdown, every strategy makes profit (the lowest point of a drawdown is when things start to go up again). For example, you may look at your results and see that the max drawdown was $2000. You may see that your strategy typically recovers after an average drawdown of $1500. So this is what you do: Run your strategy in live simulation. Once the strategy reaches a typical drawdown, that is when you begin the strategy in your live account.

So what you are doing is cutting out some of the drawdown in your live account, AND beginning your strategy at a typical time that it will recover, meaning higher probability trades!

Note: This is just an idea that I thought was worth sharing. I know there are some faults and I am not saying this will definitely work, but as long as it gets people thinking and adds to the community, I'm happy.

Thanks, and would appreciate feedback!


It is a compelling idea, if you could get it to work. It is kind of like equity curve trading, where you stop trading a system when the equity curve falls below its moving average. Except in this case, it is in reverse - you start trading it as heads into deeper drawdown territory.

The first issue I have with this is that you are making the assumption that the strategy will recover, and eventually reach new highs. But, what if it doesn't, or what if it hits a new historical maximum drawdown? You'll be trading it on the way down, and you might get wiped out before it recovers.

The second issue may be the bigger problem. You are now making a "wrapper" system to trade another system. And with your new wrapper system, you are reviewing all the results to make a decision when to turn it on. That means it is all in sample data, with no out of sample. So, of course the drawdown you choose is going to yield good results, because it is all in sample. You need to evaluate it for a while with out of sample results. This will be a problem, because drawdowns of that magnitude don't happen all that often, most likely. It will take a while to collect sufficient data.

I think the second issue is the big one. It is not to say it couldn't be done successfully, but you'd need a lot of out-of-sample data to verify it actually works. One possibility: make your "start" drawdown point a percentage of max historical drawdown, which you can get by optimizing over a bunch of your old strategies. Then, apply that percentage to a bunch of OTHER strategies (your out of sample set). If it yields good results on your out of sample, maybe you have something.

Good Luck. My personal experience is that equity curve trading does not really help, ever if at all. I find it better to just always trade the strategy, until you decide to turn it off for good.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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