Reduce drawdowns and make your trading results more consistent

Have you ever noticed that your trading results are either beast mode or completely shite?What I mean is that for most traders, their winners cluster… and so do their losers.This is a problem, especially for discretionary traders.See, the thing is we naturally get more aggressive with our trades after a winning streak, and more cautious after a losing streak. Which means we are trading our biggest size right at the worst possible time.
But that’s dumb (yeah I do it too)We really want to be fearful when we are getting greedy, and greedy when we are getting fearful.In other words, we want to do the exact opposite of our natural instincts, like so many things in trading.Stupid DNA.Sure you mitigate a lot of this by trading with a system. But the shitty news is that most SYSTEMS do this too.Why? When you system is in sync with the market type it’s going to work really well. And then the market type changes and you can’t find a winner to save your life.So what’s the solution? Well I tried a bunch of things over the years. The common one is to run a moving average (12 period simple seems to work best) over your equity curve and trade bigger size when when it’s above and lower.But that doesn’t really work that well, to be honest. It is either “all off” or “all on” and you find yourself trading small right when your system gets into gear. It saves you from the worst drawdowns, but at the expense of a lot of system performance. Also, when you have a lot of open trades it gets weird, since your equity curve only gets updated on completion of a trade.I’d only really recommend that simple way if you are trading a single market.Here’s what I prefer. I borrowed this from a great hedge fund trader called Laurent, so we call it the “Laurent Curve”Here I run two lines over my equity curve. An all time high, and a 20 period low.And I have a formula (from the System Building Masterclass) to gradually scale up and down size accordingly.
This is a BRILLIANT approach.It doesn’t go ALL ON/ALL OFF like the other ways do. And it doesn’t get whipsawed like the traditional methods.See how our equity curve is smooth like butter?
Clearly this is a winning solution for traders who don’t have the stomach for big drawdowns (like institutional investors who get fired for drawdowns).So HOW do you know if YOUR trading can benefit from this?Simple. You measure DEPENDENCY.Dependency is the odds of a winner being followed by another winner. Or the odds of a loser being followed by another loser.Don’t worry, it’s not as complicated as it sounds. I just made a video for Massi showing him how to do it, and if you have 5 minutes you can do it too.
What I’d like you to do is make a list of your own winning and losing trades in one big column. (it can be in R or in $) and follow the steps in the video.You are going to end up with a table like this one.
In this instance Massi’s results are MARKEDLY better during a winning streak.It’s probably not enough to justify the extra complexity of equity curve smoothing (since the system he built with the System Building Masterclass is rock solid), but if it was just a little worse, we could easily fix it with the Laurent curve.If you want to drastically improve your trading results there are a number of quick, easy fixes in the System Building Masterclass. (as well as all my own production systems)This stuff took me YEARS to figure out, and it’s going to pay for itself in your very first trade.Check it out HERE
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