Question as above.
Typically, mutual funds can experience a drawdown as high as 20% (most recently due to Covid).
Given that trading is inherently more risky and involves leverage, it seems to be logical that the drawdown will be higher.
Yet it seems that we do not accept high drawdowns.
Why?
What is the maximum drawdown you’re willing to tolerate?
I’ve never given this much thought but this is a good opportunity. Maybe there is an objective way to calculate the maximum drawdown that a strategy should generate before you junk it.
Let’s suppose I have a strategy with a 60% win rate. Each losing trade has a loss of 2% of account capital. Let’s suppose that, at the very start of a series of 100 trades, most of the losing trades occur immediately, one after the other - let’s say this is 80% of them - that is 32 losing trades in a row, each one costing 2%.
The drawdown will be 48%. This seems a lot but the strategy does not have a very high win rate, and how likely is it that you would get 32 (80%) of losing trades consecutively? And at this point, the strategy will more than recover the losses in the next 68 trades, of which 60 will be winners…
I like this thought.
But you have also not factored in how profitable it is. A high win rate may not always translate to higher profits.
Let’s say there are 2 funds you can invest in.
Fund A: annualized ROI of 10%, drawdown 5%.
Fund B: annualized ROI of 20%, drawdown 10%.
Fund C: annualized ROI of 30%, drawdown 22%.
Which looks good to you?
Between A and B is more of how conservative you are as an investor.
However, what about C? Things ain’t linear and sometimes, to seek additional returns, more risk has to be taken, which will result in higher drawdowns.
Where do we land? How do we manage?
It’s true that a strategy with a high win rate might not generate net profits. But that would be because the strategy is inadequately designed, for example having a high risk per trade or a low gain per trade, or both.
A high win rate is not a strategy, only part of one.
Some people (who can actually count a little) would say those are three funds, not two.
The big important point you’ve missed, of course, is that investing in a fund is a completely different proposition from handling your own trading, because you’re fully in control of one but not the other (a criterion which often even applies to something as basic as fund withdrawal) and for a whole bunch of other reasons, too; different criteria therefore apply.
Curious how neither your math nor your propensity to miss the point ever seem to change, however many different sock-puppet usernames you temporarily post under.
Ouch!
That’s all I can say.
Well, I may be oversensitive about it. Not least because - ironically enough - I’ve actually been wrongly accused of being three other members, here, myself!
One, who has been a friend for over 20 years and a member here for nearly 7, originally invited me here, not that long ago, when he was trying to help out the forum by inviting some experienced traders. Another I know nothing about at all but I did like and agree with most of her posts and am now pleased to have re-discovered her elsewhere. The third I’d actually never heard of at all. But then again, I’ve also wrongly been accused here of being a shill for two different companies neither of which I’ve ever actually mentioned at all and one of which I hadn’t even heard of, myself, until very weirdly accused of shilling for it - so maybe one should just try to see the comical side of these ridiculous things? Let’s just say I‘m starting to think your “ignore-list technique” has quite a bit going for it !