In this weeks ‘Trading thought’ we’re going to discuss an issue that all traders have to face…
How do you know when to stop trading a strategy?
A common approach is to wait for a strategy to reach the maximum historical drawdown and then either stop trading the system or look at modifying or optimizing it, but…
There are a couple of problems with that approach:
- Once the strategy has hit that drawdown level, the damage is already done, you’ve already taken a series of losses to get to that level,
- What if you stop trading the strategy and it recovers from the drawdown, you missed out on the recovery.
When we have a system that goes into drawdown, we never really know if it’s the beginning of the end for that strategy or if it will be a drawdown within expectations, so it can be a tricky issue to address.
Are there warning signs to watch out for that can tell us if our strategy is sick or healthy before the damage is done?
Can we manage these sick strategies differently without having such an impact on our trading accounts?
In this episode Alan Clement is going to share some ideas on measuring system health, so take a listen to our chat with Alan.
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