How to survive draw-downs

A did a word document on this in Dec 2020, and much of it applies.
Likely I will re-write the info in this thread.

Here are my thoughts.
Ive been trading now for 23 years and survived. The last year was by far my most profitable in 23 years, was enjoying new highs for many months in a row, but was sure a decent draw-down will come. Sorry for the bad news but its like taxation and death. You cant escape them, but lot you can do to minimize the pain & or delay it.
Draw-downs are painful, but much less so if they come out of profits.
If you cant handle the stress, use smaller position size , re-evaluate what you are doing or put your money else where

In my mind system failure is the greatest risk in trading. No matter how good the algorithm, developer, track record. This risk is unseen by portfolio software and by traders without years of experience.

1) Don't over trade. Ive never seen any aggressive trader survive long time.
If your worried about exchange margin, my guess is your twice as aggressive as you should be.
I allow 4 * max previous draw-down for capital allocation. That applies to each system, not the portfolio. Portfolio dd will be much loser.

2) Don't put all your trading capital in one system. GSBsys1es had 4 years outstanding track record. I have a strong suspicion this became a magnet for capital without diversification in other systems. I also believe that the version 2 variants of this system are better than the version 1 variants, but I trade all variants in roughly equal weighting of contracts.
I add systems well before I add contracts.
Look at the negative period performance table between systems.
see tables down the page here.
https://trademaid.info/gsbhelp/Systemsforsale.html


Observation is that even the same system on different markets gives significant diversification, though different systems are much better.

3) your future DD will be greater than your last and or in sample DD.
I will post updated graphs as an example on this.

4) When is a system busted?
No one I know claims to have got this nailed. I can say look at what similar systems are doing on the same and different markets. Look also how similar systems are doing by completely different authors. From 2004 to 2006 you are not going to make money day trading ES regardless of what system you are trading. There was simply no range or trend.

5) Understand the current market conditions.
This is a bit subjective and only easy with the condition of hind-site.
2 years ago or so, long only systems went ballistic. I was late to scale up my long only systems and late to decrease position size. Hence very low profits during that period. (much better than losses though)
On the plus, we then had a bear market with superb conditions for ES NQ day trading. I significantly changed weighting of systems to these markets, with glorious profits. However I was deliberately slow to increase position size with a much bigger account size, as I didn't want the next major draw-down to be really painful.
Now I have a DD coming out of fat profits.
I still kept trading some of the other markets that were not going great, but just at low leverage / weighting.
Of course this is not helpful to new traders who start trading straight into a DD

5b. Beware of tight stops. Risk averse traders often put really tight stops in times of extreme volatility. This tends to have disastrous results.
Being risk averse is fine, but trade a micro contract if you cant afford getting stopped out multiple times in a how.

6) How often do you re-optimize.
Experts are divided on this topic. I can say GSB systems dont need frequent optimization and normally work better on anchored, rather than rolling walk forward.
you can read this topic for more detail.
https://trademaid.info/gsbhelp/ArticlesPart1Howoftendoyounee...


I will add to this significantly in time, and when I look at end of month results


Here is a graph of gsbsys1es from a week ago.
my comments were

Look at the hypothetical graph. $20 rt commission and $25 round turn slippage used.
Unusual in that the OOS last few years was better than IS- but i put that down to extremely good market conditions
note also how the OOS curve is choppier than the IS curve - again normal that oos is in some ways worse.
The previous oos draw-down from in sample results was about twice the later draw-down. Again this is normal. (as of a month ago)


Attachment: Login to view the details





As for what to trade.
This is a good guide, but hopefully will be refined a lot with the next build of PA pro showing alternative similar options.

One thing to remember, is that sys 1 etc, have a very low max dd, and it does not take much randomness and stops in a row to break this... So I would not say that even doubling the existing dd, is a metric to define the system as broken.. I agree with Peter, that looking at all systems in a market combined, gives you a very good view if a market perhaps has changed, and needs a different weight.. knowing if an individual system had failed or the market in general, makes your decision making much easier.

In regards to system portfolio rotation, picking the worst systems, every n time, actually provides you with best end result most often (we backtested this ).. but that only is the result of testing on systems that you have, meaning that all those are picked with the wisdom of hindsight.
Picking the best systems, can very often lead you into picking system that have peaked, and are about to head into dd, and the systems you rotate out of are the ones that are about to head into highs.. meaning that you could risk ending up with a double dd..

However, picking the best ones, enables you to be sure, to never be in broken systems,

You make the choice

My choice is to rotate into into top n systems from each lookback period, using , 3m 6m and 12m.. so you get a variety of lookback periods, hopefully reducing the risks above.

Avoiding the bad, is more often more beneficial than picking the best... imho

SO while we are in a significant draw-down now, i got the results of a few users accounts for last 12 months. Note however other users, often trading the same (but less) systems PL is really bad. This comes down to system choice, execution errors etc.

This account has $40 rt brokerage, and hence why its only trade emini, not micros
It peaked about 105k profit, down to 95k





This account $254k PL, and note how much was made on mnq vs nq
Sorry the font is so small, but couldn't get it all on the screen otherwise


Profit $230,231



This is another account that started under 100k
$127.85% annual return. The monthly bar graph is good to see the size of draw downs / run ups

Quote: Originally posted by Daniel UK1

One thing to remember, is that sys 1 etc, have a very low max dd, and it does not take much randomness and stops in a row to break this... So I would not say that even doubling the existing dd, is a metric to define the system as broken.. I agree with Peter, that looking at all systems in a market combined, gives you a very good view if a market perhaps has changed, and needs a different weight.. knowing if an individual system had failed or the market in general, makes your decision making much easier. In regards to system portfolio rotation, picking the worst systems, every n time, actually provides you with best end result most often (we backtested this ).. but that only is the result of testing on systems that you have, meaning that all those are picked with the wisdom of hindsight. Picking the best systems, can very often lead you into picking system that have peaked, and are about to head into dd, and the systems you rotate out of are the ones that are about to head into highs.. meaning that you could risk ending up with a double dd.. However, picking the best ones, enables you to be sure, to never be in broken systems, You make the choice My choice is to rotate into into top n systems from each lookback period, using , 3m 6m and 12m.. so you get a variety of lookback periods, hopefully reducing the risks above. Avoiding the bad, is more often more beneficial than picking the best... imho

Quote: Originally posted by cico

Quote: Originally posted by Daniel UK1   One thing to remember, is that sys 1 etc, have a very low max dd, and it does not take much randomness and stops in a row to break this... So I would not say that even doubling the existing dd, is a metric to define the system as broken.. I agree with Peter, that looking at all systems in a market combined, gives you a very good view if a market perhaps has changed, and needs a different weight.. knowing if an individual system had failed or the market in general, makes your decision making much easier. In regards to system portfolio rotation, picking the worst systems, every n time, actually provides you with best end result most often (we backtested this ).. but that only is the result of testing on systems that you have, meaning that all those are picked with the wisdom of hindsight. Picking the best systems, can very often lead you into picking system that have peaked, and are about to head into dd, and the systems you rotate out of are the ones that are about to head into highs.. meaning that you could risk ending up with a double dd.. However, picking the best ones, enables you to be sure, to never be in broken systems, You make the choice My choice is to rotate into into top n systems from each lookback period, using , 3m 6m and 12m.. so you get a variety of lookback periods, hopefully reducing the risks above. Avoiding the bad, is more often more beneficial than picking the best... imho Daniel, thank you very much for sharing your point of view and even backtested experience. Have you ever think to look back even on 1m period? For example mentioned Sys1 from 6m period is not so bad, but from 1m lookback period it is a full loss.. And if I can have a second question, how often do you rotate? I'm thinking if a week period can bring any advantage or if it would just bring an work overload / overfit.. Thank you.

Quote: Originally posted by timemeantnothing

Current drawdown hurts. Is anyone else feeling the pain or am I the only one? lol

Quote: Originally posted by admin

SO while we are in a significant draw-down now, i got the results of a few users accounts for last 12 months. Note however other users, often trading the same (but less) systems PL is really bad. This comes down to system choice, execution errors etc. This account has $40 rt brokerage, and hence why its only trade emini, not micros It peaked about 105k profit, down to 95k This account $254k PL, and note how much was made on mnq vs nq Sorry the font is so small, but couldn't get it all on the screen otherwise Profit $230,231 This is another account that started under 100k $127.85% annual return. The monthly bar graph is good to see the size of draw downs / run ups