StockFetcher Forums · General Discussion · How To Reduce Drawdowns<< 1 2 3 >>Post Follow-up
230 posts
msg #106733
Ignore wkloss
6/23/2012 12:34:00 PM

I developed a system on ETFREPLAY that has great gains and a terrible max drawdown. It uses XIV & VIX on a weekly basis. I will be happy to give more detail on the setup if anyone is interested. The compound annual growth rate is 280% and the max drawdown is 42%.

The big problem came between 4-20-2012 & 5-18-2012 with 4 consecutive losing trades.

Using puts for insurance came to mind but XIV doesn't have options although VIX does.

A couple of ideas I had were

1. Using a small account size where the max drawdown wouldn't have a big effect on my total trading account or

2. Reducing the size of the next trade after a loss.

Does anyone have a better idea or should I just forget about this one?

767 posts
msg #106738
Ignore gmg733
6/23/2012 3:06:48 PM

I'm always interested in thoughts and ideas of systems.

The best way to counter a draw down is to have some portion of the "portfolio" in a non-correlated asset or a hedge if you will. But without know more about the 'system' it would be difficult to say one way or another.

If the 'system' is one of those statistical probability type of trades, then account management or sizing in the grands scheme of the portfolio is definitely a good idea. So if you have 100k account and you want risk not more than 5% capital on any one trade, then you have your answer.

There are some progressive/regressive strategies that may work well. If you are interested, I'd google this and you come up with strategies for playing black jack and other games. However, I think they can easily be put into practice. I have done some research on this and one method did stand out as a possible candidate, though I never did anything with it or put it into practice. It was more of a hybrid approach. I'll dig up my notes if you are interested.

230 posts
msg #106739
Ignore wkloss
6/23/2012 3:52:14 PM


You didn't mention whether you use ETFREPLAY so for now I will assume you do.

Your portfolio is XIV & VIX. Under the Portfolio Relative Strength tab, set Update Schedule to weekly; set Return A to 10 days & 20%; set Return B to 5 days & 30%; set Volatility to 2 days & 50%. Because these ETF's haven't been around very long, I backtested 2011 to present. Its up 619% so that got my attention. Optionvue and Larry Connors both have volatility trading strategies with impressive results so I believe there is some value to the concept.

You mentioned digging up your notes on drawdowns and I am interested in that information.

I just finished reading your Lawrence Chan post and found it very interesting. I traded Market Logic's seasonality system in the late 1990's and made a lot of money before it stopped working. The 2nd part of Double Up was a variation on month end seasonality. Some years later I read an interview of a hedge fund trader who used month end seasonality but only took trades if the index he was trading was below MA(10). I never tested it and don't know if that was more of a bear market variation.


767 posts
msg #106742
Ignore gmg733
6/23/2012 6:51:06 PM

I do not subscribe to ETFreplay, though I have thought about it. I do have some models that I created based off of Faber's work from ETFreplay. Then they shut off the 'plug in our own ticker' capability and I just never pursued it.

One strategy that worked fairly well (if you can take draw downs) was to have 100% weighting on 3 month performance and use the ETFs QLD, UBT and SHY. Monthly rebalance. Not bad results. Anyhow...

I have to run for now, but I'll see if I can't find my notes on progressive money strategies. It was much like the black jack strategy. Essentially, after 2 or 3 winning trades you are 'playing' with house money. If you are playing statistical advantageous trades, I think you can see where this is a handy strategy for capital preservation.

I have been think of some binary strategies lately for volatility instruments. The problem I have is the ETFs that are offered by firms like Credit Suisse is they rig the game. The whole TVIX debacle has me shy of these instruments. The VXX or VXN may be a more plausible vehicle. I read up extensively on these funds and it seems the end result of these vehicles is to go to zero due to the way they operate. So if I dabble in this arena, it will be for a one day trade.

749 posts
msg #106819
Ignore miketranz
6/28/2012 11:23:49 PM

Never hold a stock or ETF below your entry price.If you do,don't let small losses become large losses.When a trade "drawsdown",meaning it is drawing the capitol out of your account,it's making a directional move against you.It's a place you don't want to be.I've heard of stock market gurus recommending 10% or better stop losses,drawdowns.At that rate,in a very short time,you won't have much of an account left to trade with.The ability to scratch a trade quickly,before it causes sizable losses,is the key to staying alive in the game long enough to gain the compendency over time to become profitable...

4,689 posts
msg #106838
Ignore Eman93
6/29/2012 3:05:16 PM

I agree Mike but it is very hard to hit the exact price point to avoid any draw downs...

230 posts
msg #106842
Ignore wkloss
6/29/2012 5:34:37 PM


I agree with you but if you review my post at the start of this topic, my system trades XIV & VIX on a weekly basis and has done great except for a horrible drawdown. With XIV & VIX, their daily movements can be large and I suspect most stop loss strategies would just run the stops.

Previous posts about money management strategies used in gambling make me wonder if I should use something like a reverse Martindale (if there is such a thing) where I reduce trade size after x number of winners. This would exchange upside potential for downside protection.

Perhaps there is no answer and I should keep the trade size small and be glad my system works most of the time.


4,599 posts
msg #106844
Ignore Kevin_in_GA
6/29/2012 7:10:41 PM

1. Use statistics to identify high probability trades.

2. Only enter when the stats favor you. This is a cardinal rule, never to be ignored.

3. Use stops based on stats as well - do not set them too tight based on ATR or you'll get stopped out.

4. Same goes for profit targets - analyze prior trades and set your profit target based on maximum likelihood of hitting an acceptable profit. Think baseball here - hit for a single and not a home run. Lots and lots of singles ...

5. Be in cash at the end of every trading session.

749 posts
msg #106848
Ignore miketranz
6/29/2012 10:06:11 PM

Wkloss,the stats your system produces,280% compound annual growth rate is incredible,even with a large drawdown.What would happen if you 1)lowered position size? 2)Tweaked the system with some kind of stop loss? 3)Stay with the system and accept the fact that there will be very large drawdowns at times,but in the long term according to your stats,you come out way ahead of the game regardless.I myself never traded or heard of such a system,but would be interest in seeing how the system basically works.I would be glad to help.Eman,when I enter a trade,I want to execute at a point where I know immediately if I'm right or wrong,then take the appropriate action.Some call it an inflection point,pivot point,breakout point.There's no guessing,hoping,wishing,praying.One of the most difficult things to conquer in trading or investing is taking a loss.It's part of the game.The market will always educate you quickly and harshly in risk management when you're on the wrong side of a trade.Thanks,Mike...

287 posts
msg #106851
Ignore novacane32000
6/30/2012 11:17:49 AM

So Mike. You are buying or shorting "at the worst possible moment" and saying " I am going long here,if it goes any lower I'm out".
Is that your thinking during a trade? Correct me if I misunderstood.

StockFetcher Forums · General Discussion · How To Reduce Drawdowns<< 1 2 3 >>Post Follow-up

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