In recent years there has been an increase in sizebale retracements against trends as measured by systems such as BBBO. The performance of them reflects that. Inspecting monthly charts confirms that observation also.
Drawdowns of just about all better known systems have increased, often to the point of confidence annihilation. For some the answer is to use very long term TF systems. They suffer also drawdown increases but to a lesser extent. With such systems the severity of the drawdown often stems from sizeable give backs of open profits while the closed trade equity curves are still friendlier.
It appears to me that increasing or starting investment during a severe drawdown with the closed trade equity curve also having come down somewhat, maybe half of its max dd, is a promising approach. One would then hopefully enjoy the recovery and the curve's march to new equity highs and would be in a much better position to weather the next drawdown.
What to do against the open equity drawdowns? Partial liquidations after large price increases with an accompanying sharp rise in volatility ("blow off top") comes to mind. I have done that in the past and didn't regret it. Remember Natural Gas in 2003 and 2005 for example? However, I do not have this systematized and do not consider it a dependable solution. But if I have nothing better I do that when the move is outstanding. This goes in the direction of what is called rebalancing. Probably not the best thing to do in trend following, so only to be used in rare situations.
I find that markets are now also much more linked than in the past. The recent commodities downturn since March is a good example. Only few markets have resisted the collective nosedive so far. If this continues drawdowns are likely to increase further as volatility stays high.
All this results in a decrease in MAR and that is not good. I am very interested in what observations and conclusions others have reached.
Retracements, drawdowns and surfing the curve
In general, I'm finding about the same things that AFJ Garner has said in various posts here over the last 18 months. For 100.0% purely mechanical systems, I'm finding
- In general, more is better. More markets ("trade them all"), more simul-traded systems, more asset classes, more ... , seems to result in higher gain/pain ratios for the final ensemble.
- "Scaling-out" (liquidating a position in several pieces at several prices) seems to improve gain/pain ratios on quite a few systems. So does "scaling-in" (initiating a position in several pieces at several prices). Not on every system, of course, but on quite a few of them.
- In each market, "lower than average risk" entry signals seem to have noticeably different profitability than "higher than average risk" entry signals. If you can somehow isolate the X% of trades in each market that are the lowest risk (X not necessarily equal to 50.00%), they tend to have noticeably different profitability (measured in R-multiples, or in the final Sharpe Ratio of the final equity curve) than the (100 - X)% of trades that are the highest risk. Testing may help find appealing values of "X" and may help decide whether you prefer the lower risk, or the higher risk, entries.
- The best of the large-trader-workload systems, seem to outperform the best of the small-workload systems. More orders, more fills, more moving the stops, more bookkeeping, more rollovers, more total actions on the part of the human trader, seem in general to be somewhat correlated with higher performance. Not just frequency of trades, but rather human trader workload. I feel confident that LeapFrog will agree. (This may just be another way of saying "more is better"). Whether you will decide that the benefit justifies the cost, is a personal decision. Subjective human judgment.
Hey Sluggo,
Thanks for your post. I was just wondering what is your definition for 'lower risk entry". Are you describing price risk?
eg.
Stock A: entry at $20 and our stop is 18 so the risk is 2/20=10%
Stock B: entry at $20 and our stop is 15 so the risk is 5/20=25%
Assuming we can only pick one of these stocks, in general are you suggesting with your research that buying Stock A every time will have large and noticible affects on the profitability of our trading in the long run?
Thanks for your post. I was just wondering what is your definition for 'lower risk entry". Are you describing price risk?
eg.
Stock A: entry at $20 and our stop is 18 so the risk is 2/20=10%
Stock B: entry at $20 and our stop is 15 so the risk is 5/20=25%
Assuming we can only pick one of these stocks, in general are you suggesting with your research that buying Stock A every time will have large and noticible affects on the profitability of our trading in the long run?
