Retracements, drawdowns and surfing the curve
Posted: Wed Jun 04, 2008 12:00 pm
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.
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.
