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> Dingo mentioned stops. You could try percentage loss, either fixed
or a function of ATR....
My own experience with stops on actual individual trades (and
backtested results) over quite a long period of time has proven that
no matter how well you engineer your stop loss system, you are going
to experience the occasional 35% to 60% 'overnight' loss on individual
stocks that either announce poor guidance or that have been the
victims of targeted attacks from short sellers who have managed to
locate a public 'mouthpiece' to publicize their 'rumors'.
Back in the middle to late 80's, a fella named Dan Dorfman on CNBC
used to regularly cost me high percentage losses on my individual
stocks by broadcasting rumors that were fed to him by people that I
later learned were manipulators who had channels to Dorfman in order
to publicize the messages they wanted publicized.
The smaller the number of trades in your system, the more closely the
correlation will be between MaxTradeDD and MaxSysDD.
In my systems, I seek larger number of trades so that the occasional
50% "Trade" drawdown is offset by the greater number of trades whose
stability prevents a large MaxSystemDD as a result of individual Trade
Drawdowns.
Insofar as Dingos comments about 5% and 10% system drawdowns, I agree
with him.
Even when I am trading a 'system'... If I experience system drawdowns
of a relative small percentage that correspond to overall market
volatilitiy, I'll start downsizing my exposure (abandoning my own
system). I did this in early 2000 and was happy to ignore my systems
during the major market stumble during that time period.
Unfortunately, I have not been able to automate a backtest system that
would have taken me out of the market during that timeframe.
I'm not offering a lesson or instruction, but am just sharing real
experience.
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