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> How do you know when your system has stopped working?
I think it helps to have a feel for how your system works and what
its normal behavior is. If it diverges from what is normal, then you
need to pay attention. It's also very valuable to have a feel for
what the *market* is doing. If the market starts acting differently,
and your system starts to act differently at about the same time, you
may have a problem.
Aaron wrote:
> Just having a one month longer drawdown than you've ever seen
> before probably isn't statistically signficant. But if the average
> of your last 100 trades is 3 standard deviations less than
> expected, then that is very significant.
That may be useful if your system trades 100 times a month, or
something like that. For my best and most reliable systems, 100
trades is 1-2 YEARS. I can't wait that long to realize something has
gone wrong.
The ideal situation is to have a system like the one Bob posted. If
your system very seldom has downturns, then any significant downturn
is cause for alarm.
If you're not lucky enough to have a system like that, then you'll
have to accept the history of your system as a guide. You'll use the
same process you'd use with Bob's system, but use your system's past
performance instead of Bob's.
Bob's system would be suspect if it had a 5-10% drawdown. For your
system, 10% drawdowns might happen all the time, but maybe 50%
drawdowns are rare. In that case you might have to accept that
you'll have to stomach 20-40% drawdowns on a regular basis before you
can tell something has gone sour. Capitalize yourself and set your
leverage accordingly.
Gary
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