Up 55% or so for the year. Currently in 7 single lot positions (with 1 being a double). Profitable in all except 1 - that one has a $12 loss right now. Equity chart at the very bottom.
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Here is the next installment in "The Trading Process" series...
The Trading Process - Drawdown
Last time, I discussed that as part of your Trading Plan, you need to determine your goal for rate of return. That is a pretty easy one, and pretty enjoyable too!
Determining the drawdown you can endure is just as important, but not as enjoyable. Drawdown is the amount your account falls from an equity peak. Step 3 in the trading process is determining the amount of drawdown you can handle.
For drawdown, you simply need to determine how much money (or what percentage) of your account you could afford to lose. You might also want to attach a time limit to it. For example, "I want a strategy that has no worse that 25% drawdown, and that drawdown cannot last more than 3 months."
With a goal like that, you have something to measure any strategy you develop against.
A couple of pointers:
1) If you develop a system by backtesting, your actual real life drawdown will almost always be worse than your backtest. So, if you backtest says 10% maximum drawdown, count on at least 15-20% maximum drawdown.
2) If you think you can endure 50% drawdown, in reality you probably can only endure 25%. This is a working theory I have, based on discussions with many traders. My "Expert Council" (more on them in a future post) agreed with this idea.
EXAMPLE: For the contest, I decided on an "all or nothing" approach. I decided that I would trade this account until/if I had an 80% drawdown. I don't use this large a drawdown in my "normal" trading, but 80% fits this particular purpose. And I can live with it. That is key - make sure you can live with whatever you decide.
Next time: some more trading plan objectives that you should have.
