|
PureBytes Links
Trading Reference Links
|
Brian Keith Voiles wrote:
> My daytrading system for the S&P 500 must be in a draw-down... is there any
> data,
> studies, or information in general about how long a draw-down period should
> last? I'm getting stopped out left and right... I've decided to go back to
> paper
> trading until the draw-down period is over -- hopefully I've got enough
> money in
> reserve to cover my butt in the meantime.
>
> Although the last 5 trading days in March didn't work out very well for me
> (that's
> when my draw-downs started) I still made 260% ROI after commissions and
> other costs.
> In February I made a 464% ROI... with just 1 losing day... a loss of $423.
> In January I made an 83% ROI... with just 1 losing day... a loss of $2,020.
>
> Now, here we are in the end of March and April and I've lost 31.7 points
> ($7,925)
> in the last 2 trading days... due to getting stopped out from the
> whipsawing in
> the price movement. (My research shows an optimum stop placement to be
> 4.8 points in the S&P -- Risking $1,200 per trade).
>
> I understand draw-downs are inevitable... but being fairly new to this game
> (just
> under 2 years) I'm concerned because this is how I've been making my living
> for over a year now. Any advice or suggestions are welcomed.
>
> Warmly,
> Brian Voiles
Brian,
Your job is to figure out something that works and given that the market is
constantly changing adapt to those changes. What worked today is not likely to
work in six months. The markets job is to move all players as an aggregate to a
zero economic profit when adjusted for risk. This means that over time
maybe 5% will make a decent profit and get paid in a positive risk reward
manner for the the risk they took. The other 95% must balance out the few big
winners. Also, over time, there is a good chance that the musical chairs of
market trading will shift so that today's winners will be tomorrow's loser. My
guess is that only 95% of the 95% will remain profitable over a long period of
time.
What can you do about this? Use a money management technique that reduces
your exposure or
gets out of the market when your system is losing. This is do different that
being in Chicago on a 70 degree day, wearing T-shirt and shorts, and then the
temperature drops 40 degrees and starts snowing.
It happens! Be there! What do you do? Do you stay outside and freeze your
butt? No, you go inside and if you have to be outside you change your clothing.
Same thing. The market weather changes and you must adapt or die financially.
My two simple tips are keep a chart of your trading equity. Treat it just
like you would a stock or commodity you are trading. Is it a long or a short?
If it gives a sell signal, you need to cut back or get out of the market.
Another approach is that each time you have a losing trade, cut your trading
size in half. This allows you to continue testing your systems so that if they
do turn around you will know it.
Then, with each two consecutive winning trades, increase your trading size by
an increment that is less than the increase in your equity. This way you
shouldn't be able to give back more than you made.
Let us know what you come up with and let us know how it goes.
Best Wishes,
Norman
|