Tracking open equity drawdown is detrimental to you.

Discussions about personal psychology for the individual trader.
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rabidric
Roundtable Knight
Roundtable Knight
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Tracking open equity drawdown is detrimental to you.

Post by rabidric » Wed Jun 13, 2012 4:37 am

Okay, anyone moderately well-versed in the subject knows the ins and outs of total, open, closed and core equity. And I know it is "industry standard" to use total equity DD.

My [somewhat rambling] point here is that it is detrimental to your trader mental wellbeing, as it is nearly always negative, and overly discounts recent big successes. Perhaps better to use a more "momentum based" day to day equity measure, like equity now versus equity 1 week or month ago. Core equity does a pretty good job of this by itself tbh.

At the gut level time is an important factor- we can handle a quick volatile ping up 30% and back 15% over a week or month and take it in our stride, since we are instinctively "up" on balance over the recent past, and this might be the start of a big volatile trend phase in many markets (or whatver we tell ourselves) so we feel okay. At some point though there is a timelag threshold of "recent/not so recent".
The same move spread over 6-12months, with likely more position turnover incorporated, gives a different taste in the mouth.

I think the key difference is whether or not we feel we are making bad decisions in the losing phase i.e. are we exiting after declines. Reconciling this with the fact that this turnover implicitly is affecting our closed/core equity(whereas lack of turnover doesn't really), I can't help but think that the process of making money in markets necessarily has to be somewhat "open equity agnostic" at its core

Tracking the adverse moves in open equity that don't impact closed equity goes against this and therefore gives a kind of cognitive dissonance for traders. Which is bad for clear thinking.

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