First, just so everyone is on the same page, a drawdown is a drop in equity, measured from the peak to the trough.
Here is my equity curve for the contest, with the 4 largest drawdowns identified:
4 BIG drawdowns, in just the first 3 months! Most people would not be to handle these, especially the 49% drawdown. Who can handle losing half of their account?
Keep in mind that these drawdowns are for a contest account - my personal accounts have smaller drawdowns. Although, I have experienced a 50% drawdown before in my less leveraged accounts, back in 2010.
Drawdowns are simply part of the trading game. People that tell you trading drawdown free trading is possible are not being truthful, in my opinion.
So, how do these drawdowns compare to other contest participants? My friend Andrea Unger, one of the best traders I know, and a three time winner of this trading contest, shared the following equity curves with me.
What is fascinating is that in each of those years he had at least one drawdown approaching 50% (in his best year of 2008, it looks like he had a 75% drawdown). But, he ended each year with over 100% return (115%, 240%, 672%).
PERFORMANCE LIKE THIS MAKES ANDREA ONE OF THE BEST TRADERS I KNOW - BECAUSE OF HIS ABILITY TO WITHSTAND DRAWDOWNS.
Most people would have given up during one of the drawdowns. But, not Andrea. He had a solid trading method, and he knew that he would recover from those drawdowns. And, each of those years, he won the contest!
So, what are the lessons here:
1. Drawdowns are normal for trading futures, and drawdowns can be extreme.
2. Drawdowns occur even with solid trading methods. The key is to realize that you can't quit because of a drawdown (unless, of course, it is far beyond your expectations - signifying a broken system).
3. Successful traders do not fall victim to drawdowns - they endure them.
4. IF YOU CAN'T HANDLE DRAWDOWNS, DON'T TRADE.
A big "thanks" to Andrea for sharing his equity curves. Please visit Andrea's website: http:///www.oneyeartarget.com to learn more about Andrea and his trading.
Good stuff Kevin. I tire hearing of the "make a little each and every day" mentality. Maybe it can be done, but I've yet to see any documented equity curves of anybody doing it. Lord knows I've tried...Funny thing is, seems the less you worry about chasing the ideal of "steady income" the easier it is to be profitable at the end of the year.
ReplyDeleteIn my experience, most if not all of the year's profits come in less than 6 months and sometimes from even just a few great months.
I've questioned a few popular authors/educators on this, but all they ever give is the impression that they or an unnamed "friend" are profitable nearly every day. Of course, there is always some excuse why they cannot provide any kind of documentation of this.
In your opinion, are they selling a pipe dream or do you personally know of anyone profitable on a nearly daily basis over a period of years? And I don't mean the kind of trader that makes a little every day then loses a year's worth of work in a day or two.
Sorry for the long, rambling post but I wanted to year your thoughts as you are one of the few that speak the truth.
Thanks and we're rooting for you in the contest!
Philip
Ooops, meant to ask in the earlier post if you would be willing to share your equity curves from the earlier years you participated in the trading contest? Thanks!
ReplyDeleteThanks for the great comments and questions. I have turned them into a post, since people sometimes overlook the comments section.
ReplyDeleteTHANKS!
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