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Drawdown

Watching For a 10% CorrectionOver the last 20 years, a 10% correction has occurred in about 12 out of those 20 years. The point is: 10% corrections are pretty common. Also, of all of those drawdowns, the average pullback was actually 15%. So not only are 10% corrections common, but they can go to 15% without being out of the ordinary. -20% drawdowns are less common. If you use the last 50 years of data, you can observe that they usually occur every 10 years or so. -30% drawdowns far more rare, but still occur as seen in years like 1999/2000 or 2008/09. You want to be prepared for anything. Keep in mind a lot of this data changes depending on how you study markets, specifically when you begin backtesting the data and what index. For example the S&P 500, Dow, or Nasdaq. In addition, the data changes fast depending on your starting point from 1920, 1950, or more recently like 2000. With all that being said, for swing traders, there is one interesting anecdote to consider: On average, the biggest up days occur within two weeks of the biggest down days. Picking bottoms and buying dips is extremely challenging. But, over time, the worst down days and worst corrections have lead to the biggest bounces and up days. As a swing trader, this kind of volatility is what can make or break a year of trading. Here are some final notes: 1. Swing traders can make some excellent trades shortly after the biggest drawdowns 2. Corrections have happened all throughout history with a 10% correction being fairly common and a 20% not being out of the ordinary. 3. Support, resistance, and other indicators are important, but so to is measuring the extent of a drawdown. With all of that being said, I have no idea where markets are going next. I am simply watching, setting an alert, and fascinated by the price action we could see at -10% for the major indices (if they get there). I suppose that means a little more patience. Good luck and thanks for reading!
AMEX:SPY
by scheplick
22
ACCOUNT DRAWDOWN – HOW TO AVOID IT?Today I want to touch on a very important topic - account drawdown. Every trader will face this problem sooner or later, because losses in the forex market are inevitable. And if a professional knows what to do and has experience dealing with such a problem, then beginners often get lost when faced with a drawdown, which leads to even greater losses. What is a Margin Call? Margin Call - is a "call"-notification of the broker with a requirement to deposit additional funds to guarantee open transactions. If no additional funds have been received to the trading account after the Margin Call, and losses continue to grow, then when the price reaches a certain value, the Stop Out procedure will be launched, and the brokerage company will automatically close part, and possibly all transactions on the trading account. Causes of drawdown. There are two possible reasons. The first reason for the drawdown is a bad trading strategy. Each strategy needs to be checked and only then use it. No risk management will help if the strategy is unprofitable. The second reason is psychology. Even if you have a proven strategy, you can still lose money because you lose control of the situation. Discipline is the key to profitable trading. To act according to the strategy and even after a series of losses to adhere to the plan and not exceed the value of risk management - that's what a professional does and a beginner misses. Newcomers try to regain what they have lost by opening deals with a large volume, risking even more money, driving themselves into an even greater minus. First of all, you need to put up with losses, it is impossible to avoid them! Accept losses, do not lose your head, trade further according to the rules and then you will not only return, but also earn even more money. An important thought! Every beginner should remember that the more he loses, the more he will need to make profits in the future in order to reach zero. It is very difficult to make 50% of the profit to the capital in one transaction. It is almost impossible to make 100%, but beginners do not understand this and invest a lot of money, open positions with a large volume and lose even more. Losing 1% is not so scary, losing 10% you need to do 11% already to get to zero. Having lost 50% in the future, you will need to make 100% to go to zero! Don't bring your account to this. Remember: it's better to move up slowly than to fall down quickly and crash. Decide on the drawdown level. Professionals do not let their account fall below reasonable values. A beginner brings his account to exhaustion in two or three transactions. For a beginner, a drawdown of -50% or -70% occurs easily and quickly, a professional cannot afford this. Each trader must decide for himself how much percent of the capital he can lose and still remain calm. For each person, these values are different, someone cannot survive a 20% drop in the bill, and someone lives quietly with -50%. Drawdown levels up to 15% – normal working drawdown. 16-30% is not a reason to panic, but the time is coming to reduce the risks and intensity of trading. And it is also worth reviewing the state, dynamics of the market and the trading instrument. 31 - 60% is the beginning of the end. If the account is down by more than 30%, trading should be stopped and a break should be taken. After that, come back with a modified strategy for making trading decisions. Drawdown is an unpleasant thing, but the main thing is not to start it and not to delay the time after exiting it. If you have already fallen into a drawdown, then you need to follow the following rules: If you use a proven trading strategy that has repeatedly made a profit, then you just need to fix losses and continue trading using the same strategy, but with a more gentle money management system. If the trading strategy used is no longer effective, then you should fix the losses and look for a new working trading system. Due to the fact that there are no exceptionally accurate methods to exit the drawdown, your further actions will be reduced to the same trade. In this situation, the trader should identify weaknesses in his strategy and try to eliminate them. The revision of approaches to risk management and funds will also allow you to balance trading and avoid deep drawdowns in the future. Be disciplined, follow the money management, trade systematically, and the drawdown on the deposit will not bother you. ------------------- Share your opinion in the comments and support the idea with Like. Thanks for your support!
Education
by DeGRAM
6
Market in troubled time, including BitcoinHi. Hope you all are well. Price analysis Considering the Arnaud Legoux averages, I can see the strength of the trend within the price chart itself. What we have? The average of 32 (green) has crossed below the average of 64 (blue), and there is now an expansion in width between these two averages. And the average of 128 (white) started to slant down. This indicates a fall in the short and medium term. The averages of 256 (yellow) and 512 (orange) still point up, but tend to sideways, indicating possible support and resistance. Hard time to predict. In a possible bigger drop, theoretically the next support would be in the average of 1024 (cyan), and if a meteor falls on the Earth it would be in the average of 2048 (purple). In short, we see a driving force pushing the price down, at least in the short term. It remains to be seen how long this will happen. On-chain analysis Now let's look at Glassnode's indicator 'Price Drawdown from ATH', which is the percent drawdown of the asset's price from the previous all-time high. Currently, the loss of those who bought at the top is 27% (0.27 x 100). What is the crux of this indicator? The best buying region is when the drawdown reaches high values, and then there is an upward reversal. We can cite the peak of July 20, 2021, when the drawdown reached 50%. Soon after that, the market understood that it was a good region to buy, and the price continued to rise. If this happens again and the market crashes, the next good entry price would be $28,755, when the drawdown reaches 50%.
INDEX:BTCUSDShort
by andre_007
1
Performance distribution of retail investors and hedge fundsMy thoughts about performance. This kind of info is not very available so I have to do some guesswork. We that spend all day in front of the computer expect to get better returns than 10% a year. But we have no idea what is possible and where we "rank" compared to others. All academics look at ever is day traders, yes 99% of day traders lose money and 1% earn peanuts while taking huge risk, we get it. And sometimes they look at passive investors. Cool. But no one ever says anything about active investors or Forex speculators, just that "on average active retail investors outperform", how wonderful, the average, yes I'd call myself the average normie definitely LOL! And regulators are even worse, all they care about is protecting dumb money and scaring people away from day trading. The french "market authority" on television was literally screaming "flee Forex it is dangerous, you should fleeeeeee!", I kid you not. First we look at retail investors. So the french "market authority" (AMF) looked at FX & CFD brokers representing about half of the individual FX & CFD investor population. 14799 persons in the 2009-2013 period. They found that over 4 years close to 90% of traders lost money. This is another of their deceptive tricks. It's just as with science these days, the data says something, the abstract says the opposite. So according to the extremely biased french AMF OWN DATA: - 30% of traders are in the "0" column, and according to their own data there aren't that many traders with tiny accounts, so ~30% breakeven. - They refuse to give any % result, some may be recalculated by overall we do not know, therefore I will assume it does not look as bad (or they'd show) - 5% of all investors make 2/3 of the losses, or at least half - 1% of all investors only are actually making significant returns (and 2/3 of the total) - As always day traders that destroy the stats are mixed with the rest - Most "winning" traders are barely above 0, making just a few hundreds to thousands a year www.amf-france.org From other sources and the AMF sort of confirms this, we know that: - Losers (especially big losers) that stick to investing, the ones that never give up never surrender in the face of adversity, the courageous ones with "heart", ye these guys, their losses get bigger and bigger actually. - Most winners continue to win and their profits get bigger. Here page 19, this is for stocks, we can see the net monthly market-adjusted returns of 62,439 households a large discount brokerage firm from January 1991 to December 1996: - On average, as they keep hammering us with, they underperform the market by 0.14% (each month!) - The average individual investor gross returns are slightly above the S&P 500 index returns (page 3) - The average individual investor net returns are slightly below the S&P index returns (about 91% of the S&P) - The S&P returns a bit less than 1.5% monthly - The worst of the worst managed to return -20.85% below index monthly, probably a permabear day trader or something - The 1st percentile is at -4.86% below market, 5th at -2.45%, and 25th -0.73% - The 99th percentile is at +4.44%, 95th +2.15%, 75th +0.50% - The best individual investor got 48.35% above market MONTHLY - The best individual investor difference between net and gross is minuscule, obviously it is not a day trader, probably some lucky investments - The gross median return is at -0.01%! faculty.haas.berkeley.edu So it seems this is how it goes, a normal distribution: We do not have that much info, and what little there is is rather hard to find, and hidden behind mountains of trashy scams "how much money can I make day trading join my course". I really only care about my own performance but it's always interesting to see how it's all distributed, what is possible, etc. For some reason I am interested in patterns and statistics. Funny. The info does not get shared a lot. Based on research and what gets exchange it seems most "traders" are VERY interested in money and "lambos" and very few are interested in stats, patterns, numbers. Ye I mean what do stats and figures have to do with investing right? It's not about some numbers it's about how much money you can make trading on a phone and what you will do with all of that money right? Honestly if we eliminate day traders that already make up at least 2/3 of FX investors, and all the lambo trolls that hate numbers but "it's ok I manage my emotions", it's not 10% making money but 30% at least I am sure, and 10% making decent money (enough to start a real career). Would be nice if they could just once separate day traders and look at FX investors with a time horizon greater than 1 day. All we can do is guess more or less, obviously more than 10% of these make money, but has to be less than 50% very probably. 10 to 50%, that's pretty wide. Probably in the 20-40 range, that's all I can say with high certainty. Hedge funds next. Hedge funds were doing great in the 90s and Morgan Stanley has a doc about them here: www.morganstanley.com Page 6 we can see discretionary funds making 18% a year with a max drawdown of only 5%. For all strategies except perma-bear the max drawdown is smaller than the annual returns. With all the regulations and harder market (and little fixed income) the results today are probably not as good but I do not think they are extremely different either. My guess on how hedge funds fulfill their max drawdown obligations is they place most the money somewhere safe (92% of the whole in case of an 8% drawdown) and then they risk the entire 8%, they might give a bit of it to each of their traders that go aggressive, and if they return 100% on the 8% that's an 8% return overall. I'm pretty sure that's the idea. But they might not freeze the entire capital and go 10X leverage, maybe they do something more complicated, with 50% in cash/bonds, 30% in "safe enough" investments, and 20% in high risk active trading with a max drawdown of 25% on these 20% (so 5% overall). The definitely do something like this, have to. The serious ones at least. The S&P returned 17.2% with a max drawdown of 15.4%, and page 4 we can see again a normal distribution: - The median directional return yearly was 16.3% (0.9% below market!) and median max drawdown 28.5% - The 75% percentile made 20.5% (3.3% above market), remember retail 75ers were 0.50% above mkt monthly - The 25% bottom only make 11.1% which is 6.1% below market for the year - Stock selection has similar drawdown and the returns of the 25, 50, 75 are 12, 17.2, 20.9 - There are no giant losers or giant winners but there aren't 66000 funds, and they have restrictions - In particular So actually pretty similar thing. The major difference is around 15% of the retail stock investors lost money in a raging bull market and no hedge funds did (except the few bears I guess). Otherwise, same normal distribution but with less extremes for hedge funds, they're more compact around the center (market).
Education
by MrRenev
1
Understanding draw down recovery 😬😥Morning traders. Middle of the trading week all ready! I thought I'd take this opportunity to discuss a topic we all fear and we all find ourselves in at some point in our trading journey. That topic being draw down and your account in a loss of starting capital. The table I have drawn on the chart shows the amount of gain required to get an account back to break even depending on how big the draw down is on your capital. Scary stuff when viewed in a simple table format like and hits home just how big of task over turning losses could be. No trading system or strategy has zero losses or draw down and all strategies endure losing runs. To avoid excessive losses there is two crucial elements. Sounds obvious but cut losing trades quickly is the first element, second element is factoring probability into the trading strategy. Probability helps control risk management which in turns keep losses to a minimum, probability is obtained by carrying out back testing on your strategy. You can't plan for probability in your risk management if you have no data for your strategy. The example I am using for this Idea is on AUDCHF H1 timeframe and thanks to our built in strategy tester I can see if I traded this pair in the manner the strategy is set over the last 292 trades at 1% risk I am 22% down on my account. It would not take in the region of a 25% account gain to be back to near break even on my account!!! You don't need a built in strategy tester to gain this information you can also manually back test a strategy in order to avoid losses and to know if you are entering markets with a proven edge. A trading edge means your strategy creates bigger wins than losses. Which in turn means you avoid the situation shown in the table. To avoid hefty draw down don't enter the markets blind with an unproven strategy. Ensure you have back tested strategies with probability factored in to those strategies that way what is shown in the table wont apply to you then 👍 ------------------------------------------ Please hit the 👍 LIKE button if you like my ideas🙏 Also follow my profile, then you will receive a notification whenever I post a trading idea - so you don't miss them. 🙌 No one likes missing out, do they? Also, see my 'related ideas' below to see more just like this. The stats for this pair are shown below too. Thank you. Darren
Education
by pow_removetheguesswork
FALSE Trading Expectations #3... Win Rate (continued) I lose a lot of the time. A large amount of my trades are stopped-out for a loss. This does not make me a bad trader, it actually makes me a real trader! Most profitable traders are right only 40%-65% of the time. A lot of traders understand that there will be losing trades. What they don't understand is that there will be consecutive losing trades. Even a strategy that has a win rate of 65%, could have 10 consecutive losing trades, maybe even more! This does not make the strategy unprofitable or not worth using. Conclusion... Expect a lower win rate. A win rate of around 50% is ideal. Expect to have consecutive losing trades. Also expect to have consecutive winning trades.
Education
by Samuel_Morton_Trader
Trading with WRONG expectations... #1Almost all traders understand the concept of a drawdown - a period of loss making. A trader is not going to have a 100% trade win rate - there will be losing trades - and there will be times of consecutive losing trades. For some reason, despite understanding this concept, many traders don't ACCEPT this concept. Let me explain... As soon as a trader hits a drawdown, the reaction is panic or discouragement. The following statements could flood the mind of the trader... 'The strategy is not profitable anymore' 'I need a more profitable trading strategy' 'I am going to lose too much, so I will reduce my position sizes' 'I need to increase my position sizes to win back these losses' 'I am so angry, I am going to risk all that I have left in my account' In other words, the trader becomes emotional and let's his emotions determine his trading decisions. This will always result in long-term failure. Conclusion... Accept that drawdowns will happen and expect drawdowns to happen, because they will happen!
Education
by Samuel_Morton_Trader
13
How much to risk per trade? Returns and drawdowns.Between 1990 and June 2000 the median hedge fund (there are not that many that started in 1990) had an annual return of 16.3% and max drawdown of 28.5% according to MORGAN STANLEY. Keep in mind the 2/20 destroys profits. (16.3%*1.25)+2% =  22.4%, and 28.5-2 = 26.5%. So what the median fund actually did I I did not mess it up was get 22.4% return a year and a max drawdown of 26.5%. Of course that drawdown is the worst over a 10 year period. The S&P 500 has an annual return of 17.2% and max drawdown of 15.4%. What is interesting is to look at the details, for example the few specialist credit between 90 and 00. The smallest return one had this to show: 11.5% annual, -4.9% max down. The biggest return one had this to show: 17.4% annual, -19.4% max down. More returns but with much more drawdown. Here is the paper: www.morganstanley.com A portfolio of hedge funds, since they're not all completely correlated, would do much better than the S&P500 in particular on the drawdown side. Renaissance says their medaillon fund uses an average of 12.5 leverage and takes 8000 trades at the same time 4000 short & 4000 long to reduce risk even more. If this is true it means going in each position with 0,15% of their account. Not sure how far their stop is but has to be less than 10% of a share price, this means a risk of 0.015% per trade at most, now since there are 8000 at the same time it would be 8000 times more than this, but since there are shorts and longs it sorts of evens out and who know what their real risk is? All we know is it is very small that's for sure. But leverage costs money, and what RenTec did was since their risk was so small and they do a ton of volume, they partnered with banks that offer them extremely cheap leverage. And then they averaged 66% a year in the past 30 years, with a fund capped at 10 billion. The secret is diversification, it reduces dramatically risk which allows for better returns. But we have to come up with this diversification, not easy to find another good place to invest in, another good uncorrelated strategy. And when we find those additional sources, we are not RenTec we have to pay a big price for leverage so we cannot just scale it hard. Certain "strategies" will help reduce risk but they also cap returns much and leverage is not free so it might not be worth it depending on the person. I just want to take a look at a few non-managed "low fee" "safe" no brain funds. Examples for the 10-year period ending January 31, 2017: Vanguard LifeStrategy Growth Fund (MUTF:VASGX) has a Maximum Drawdown of 47.6% and annual return of 4.7%. UBS Global Allocation Fund (MUTF:BPGLX) has a Maximum Drawdown of 48.7% and annual return of 2.6%. This fund has the rather unappetizing combination of low return and a large Maximum Drawdown. LoL this is so bad. And all the grandpas are loving it, they think they found the holy grail and pat each other on the back. Add to this the fact that most people withdraw at the worse time... Over the same 10 years period the S&P500, returned an annualized 7.024% dividends reinvested (4.8% otherwise) with a max drawdown of 57.8% From 2000 to 2020 (september) it had annualized returns of 6.23%. From 1871 to 2019 it returned about 9% (dividend reinvested) - 6.8% if we adjust for inflation, with a max drawdown of Adolf Hitler & Auschwitz the ultimate price. So we're about in the average with 6%. Growth is slowing down (demographics, tech limits, earth limits...) so we will probably average less than 6% in the future. From 2007 to 2017 the top strategic DIY portfolio recipes had returns of ~typically 11% with max drawdowns of also about 11%. Ray Dalio pure alpha 2 has returned 11.5% / yr in the last 20 years and max drawdown I'm not sure I think it was 8% recently and much less before that. Those numbers are hard to find seriously... But well we get an idea of how far it can get pushed. An article from 2017: "Investors earned an average of 4.67% on mutual funds over the last 20 years (Source: www.creditdonkey.com)" of course there is no mention of drawdown because who cares am I right? Mutual funds are not for the best & brightest of investors. Big risk is not a magic trick. "Big risk" does not mean "big return but with big risk". It means NO returns. It means losing with a winning strategy 😂.
Education
by MrRenev
1
3 Simple Tricks to Recover from a Drawdown like a Pro3 Simple Tricks to Recover from a Drawdown like a Pro. In our private client area, we often talk about the importance of understanding drawdowns. The first step in dealing with drawdowns is to acquire the right mindset that is conducive to trading. Do you want to learn how to live through the daily drawdown that is almost inevitable and all traders must go through? Statistics have shown that the majority of your life trading career will be spent in drawdowns. If you spend so much time in a drawdown, it’s important to learn how to recover from drawdowns. With that said, here are 3 trading tips you should use to help you recover from drawdowns: #1 Know the Maximum Drawdown of Your Trading Strategy Through effective backtesting methods, you can actually discover the maximum DD of your trading strategy. This will mentally prepare you for them. If a trader learns how to develop an awareness of what will happen to his account during a drawdown period, you’ll have the mental capacity to cope with the drawdown and stick with your trading strategy through these tough times. That’s assuming you have a profitable strategy. If you can’t learn to master this discipline, then you’re better off to stick to algorithmic trading and let the robot do the job for you. Automation will often eliminate counterproductive emotional decisions. #2 Cut Back Your Position Size Another thing you can do to cope with the painful reality of drawdowns is to risk per trade or the position size. Contrary to the popular belief that teaches you to increase your risk, so you can accelerate the recovery process, that type of behavior is very destructive for your account balance. Aggressive pyramiding to escape a drawdown is even worse. Take for example, how legendary trader Richard Denis thought the Turtles to handle drawdowns. When drawdowns occurred, they would reduce the trading size from 2% down to 1.6%. They would continue to cut back their position size if the DD was extending. This preventive action is for self-preservation of your capital. Learn it, and use it in your favor. #3 Increase your Risk-Reward Ratio A positive and big risk to reward ratio is part of every successful trading system. To escape a drawdown faster you need to learn how to increase your risk and reward ratio. One of the most effective methods to improve your RR ratio is to perfect your entry strategy. By having a better market timing you can keep your stop-loss very tight, thus further limiting your losses. With a RR ratio of 1:3, you can escape a drawdown period pretty fast even if your win rate is still somehow very low. If you can make a pact with yourself and not flinch in the face of adversity when your risk tolerance is reached your daily mental battle is half won. Final Words – Drawdown in Forex Trading In summary, drawdown forex is the most important risk metric because DD can make you switch your trading strategy if you have too many consecutive losses or if our losses last for too long. Forex drawdown can literally kill your account if you don’t know how to recover from a drawdown trading period. The only way you’ll never experience a drawdown is if you stop trading. You need to accept the reality that the drawdown in forex trading is inevitable There is no such thing as risk-free returns. You need to work smart not only to make profits but to also keep those profits. With that said, you only need to keep in mind these three drawdown trading rules, if you want to manage DD like a pro: Know your historical max DD Cut back your trading size Increase your RR ratio Thank you for reading!
Education
by Tradingstrategyguides
1