Is there anything more painful in trading than a drawdown?
I often tell people that trading is like working on a 200% commission.
You’ve put a lot of work into your strategy, and then not only could you not have anything to show for it, but you could be worse off than when you started!
There’s no question about it – drawdowns suck.
But to succeed in the long run, you have to find a way to deal with them.
And that starts well before you pull the trigger on your first order to trade a strategy.
Every decision you make about what filters to apply to your strategy, what position sizing algorithm to use, and how frequently the trades occur – everything – affects the types of drawdowns you’ll see.
Drawdowns are when traders quit; so it should be at the forefront of your mind in every step of creating your strategy.
It’s not IF a drawdown will happen in your strategy, it’s WHEN.
If you’re surprised by a drawdown when trading live, then you haven’t thought deeply enough when you created your strategy to begin with.
In my first really great trading years – the best years I’d had at the time – there was a streak where I lost 14 trades in a row over the course of a week.
14 losing trades in a row at the biggest size I’d traded up until that point.
It was terrible, but I was confident (though not 100% sure!) that the sky wasn’t falling and my strategy still had an edge when I zoomed out.
That’s why you have to look at the equity curve when making decisions about your strategy.
Boiling it down to the fanciest metric won’t work.
-Dave
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