"One can have tremendous profits, but also large drawdowns. I think indices control risk a little better."
I suspect that few observers may be wondering why we've hijacked their thread, but I believe that there are many lessons that apply both to highly systematic and to highly discretionary trading approaches.
Anyway, the only thing worse than large drawdowns is actual losses. Some of the most successful, theoretically and mathematically sound, trading systems require the trader to sustain huge drawdowns - tending to confirm the old trading adage about pain and profit arising together.
It all depends on the system you're trading. Is've put together systems that achieve 90% win/loss pcntgs., beautiful equity curves, mouth-watering profit factors, and mind-blowing exponentiating returns on maximum drawdown across a huge range of tradables. As you've probably already guessed, the systems are virtually untradable, as they rely on taking numerous small profits almost instantaneously on increasingly large positions and without significant slippage.
At the other extreme are long-term trend trading systems that, as above, pay for withering drawdowns with huge winning trades. A variety of methods are used to reduce the impact of such drawdowns (such as trading multiple relatively non-correlated vehicles, so that one or another tends to be gaining while another or a few may happen to be losing).
If I try to apply a trend-trading approach to short time frames, then, among other things, I need intraday trend-moves that sometimes appear as chaotic volatility and whipsaws in higher time frames. If MSFT, QQQ, or SPY or the S&P futures are unlikely to move significantly from the daily high or low to the other end of the day's range, and, if my system, even when successful, can't be counted on to capture more than a fraction of any such move, then my prospects are already fairly low. If the tradable rarely if ever yields trend trades far above its daily average tradable range, then the system will be unable to recover from drawdowns, which will in the meantime add up. |
