I can Withstand a 20% Draw Down on My Trading Account!
I have heard repeatedly that investors and traders can withstand a 20% draw down however I can tell you it is not accurate. Draw downs and losses are always an occurrence. They can never be avoided. If someone tells you otherwise…run…My point of this short post is that trend following and trading is always a tough marathon. If you can not even withstand a 20% draw down you should not be trading or investing in trend followers. More so, your worst draw down is always ahead of you and will be probably…much greater than 20%. Do not buy the highs of money managers only to sell their lows. It is a very true statement that Past Performance is not indicative of future performance.
Point in reference…I trade and invest with other traders. I bought the draw down of one trader last year when he was in the mid 20% draw down range. This draw down has continued and now in the mid 40%+. You will never catch bottoms nor tops as we are only dealing in complete uncertainty. You need to have an Uncle point to close the position.
Most investors or traders can not stand any draw down or uncertainty. Point in reference, I had a client who was invested in one of my programs. In all honestly, this has been one of the toughest periods for trend followers. He came in at a slight draw down. However at a 12.6% draw down in his account he basically told me that my trend following model was broken and he was going to invest in another system with another manager. Ironically so far this month, I have stumbled into some nice trades and have recouped the majority of the draw down….
Do not buy the highs of money managers and sell the lows…Realize when you are trading your own account, losses and draw downs are a natural event of trading. Your goal is to attempt to manage the risks. Look at your risk per trade, risk per sector, total risk, number of positions as well as many other money management aspects…
Past performance is not indicative of future performance