Monthly profit target and drawdown

meanreversion · May 5, 2010

I see frequent reference on this site to expected monthly returns, but very rarely any mention of drawdown. In fact I don't ever recall a comment along the lines of "I can withstand a drawdown of 50 pct" but there are plenty of "I make 10 pct a month" type comments.

How do people approach P/L management, is it to aim for a monthly target, e.g. 10 pct. But then what happens if you have a flat month, do you try to make 20 pct the following month? Or if one month is down 10 pct, then try to make 30 pct the following month to make up for it? I'm interested to hear how different people approach it.

Shanghai · May 5, 2010

Good questions. I would certainly treat each trade and each month as it goes, not try to make the money back if you have a bad month. That would be trying to impose your own will on the markets rather than taking what the market gives you.

In fact if you are having a bad month then that may be a sign that the market conditions are not suited to your strategies and you may need to be looking to reduce your risk rather than increase it to try to make the money back. IMO that's one reason why ODT's (God rest his soul) "money management strategy" of increasing the stake after a series of losses is seriously flawed.

Myself, my strategies should give me a return of 2-4% per month with a maximum drawdown of around 10%. Not excting figures to inspire a newbie but I aim to be in the game for a long time yet.

I should add that the 2-4% is an average. Some months it is 8% and others -3% for example.

meanreversion · May 5, 2010

That's very similar to my approach. It also sounds realistic and factors in a likely magnitude of drawdown. Rather than aim for a monthly return, I have an annual return in mind but realise that sometimes this will not be achieved.

Adamus · May 5, 2010

I would be able to withstand a drawdown of 50% if my backtesting showed 25% was possible.

Check out the Uncle Point - Travis has a journal entry about it.

montmorencyt2w · May 5, 2010

@Meanreversion: I think there are various ways of looking at or defining drawdown, depending on what exactly we are talking about.

How would you define it in the context of your original post, with simple examples if possible.

Depending on your reply, I may be able to elaborate on what I'm getting at.

meanreversion · May 5, 2010

Well, I define it as drop from most recent peak in equity to current trough..

meanreversion · May 5, 2010

Wikipedia has this simple code for it -

MDD = 0
peak = -99999
for i = 1 to N step 1
if(NAV > peak) then peak = NAV
DD = 100.0 * (peak - NAV) / peak
if(DD > MDD) then MDD = DD
endfor

elitejets · May 5, 2010

I have draw down rules that stop me trading and no upside targets.
A daily limit and a weekly one, which reduces the downside a bit. I still have losing periods but they are better than before. I guess it keeps me out when its choppy or trendless or I have got my direction wrong.

LiamH · May 5, 2010

I was considering creating a thread on this subject because possible drawdown and profit targets are a part of my strategy I have no idea about. I would very much like more information on this subject before I start trading again.

I am used to understanding drawdown when there is a certain mathematical expectancy - If you're going to be right 80% of the time then 10 losers in a row would not happen very often, maybe only a few times in 1000 occurrences but with trading how do you calculate it?

I mean, you can only guage probability from a statistical point of view but that means nothing.

I would guess that in trading 10 losers in a row happens relatively often so then your risk per trade becomes massively important. At 1% risk you'd be a happy bunny but at 3 or 4% risk 10 losers in a month would be down right frightening...

JRP2891 · May 5, 2010

meanreversion said:
That's very similar to my approach. It also sounds realistic and factors in a likely magnitude of drawdown. Rather than aim for a monthly return, I have an annual return in mind but realise that sometimes this will not be achieved.

I don't have a monthly target either. My profits come in 'waves' which means i'm likely to suffer significant drawdowns in between, however i come out ahead in the long run. I've had 50% + drawdowns before and survived and thrived, not overly pleasant but that's the way it goes buying strength and selling weakness at a reasonable % risked.

meanreversion · May 5, 2010

50 pct, bloody hell, how did you handle that? Was it all you could think about? Sounds to me like if you came through that, you're in the right business.

JRP2891 · May 5, 2010

meanreversion said:
50 pct, bloody hell, how did you handle that? Was it all you could think about? Sounds to me like if you came through that, you're in the right business.

They're never enjoyable, but i know i have a robust method and proven statistical edge, so i just keep executing. Nothing more to it really, but of course if i could choose not to have drawdowns i wouldn't have them! However they go with the territory as a trend trader, so no such luxury.

meanreversion · May 5, 2010

Are you Irish by any chance?

JRP2891 · May 5, 2010

meanreversion said:
Are you Irish by any chance?

English, although i enjoy a Guinness.

meanreversion · May 5, 2010

Your approach seems very pragmatic and sanguine, much as the Irish are accepting their current age of austerity (presumably because they believe things will get better eventually). You are clearly not Greek.

JRP2891 · May 5, 2010

Haha, nope, not sure who'd want to be Greek at this point in time. What a mess.

meanreversion · May 5, 2010

Could be coming to a high street near you soon. I can't see the scum who depend on welfare taking kindly to a cut in beer money from George "we're all in this together" Osborne.

JRP2891 · May 5, 2010

meanreversion said:
Could be coming to a high street near you soon. I can't see the scum who depend on welfare taking kindly to a cut in beer money from George "we're all in this together" Osborne.

I agree, it has the potential to be very ugly over here as well.

meanreversion · May 5, 2010

http://www.dailymail.co.uk/news/art...hildren-video-games--pay-huge-booze-bill.html

Folk like this

Black Swan · May 5, 2010

JRP2891 said:
I don't have a monthly target either. My profits come in 'waves' which means i'm likely to suffer significant drawdowns in between, however i come out ahead in the long run. I've had 50% + drawdowns before and survived and thrived, not overly pleasant but that's the way it goes buying strength and selling weakness at a reasonable % risked.

I've had 100% wipe outs early days (2007-2008); 100 quid, then 250 then 500, 750..lasted approx. 10 months on (up to) 50pp s-bets .. When finally *ready* I funded/reloaded with a few grand which I kept, then grew to 9ish, at which point I realised I was beginning to to develop an edge and was willing to commit more and go at this full time...My target for this year was to personally take £250K out of the markets, Jan/Feb fell short of target, March/April back on course...

Here's a thing for everyone on this thread; when trading x amount of your capital per trade etc., if you had, for example, 50K in combined accounts and you only risk max 2% per trade and never go above 10% risk across all concurrent trades, what d'ya do with the under employed 90%...?

Oh, 4.5% is my biggest single daily loss this year....

Monthly profit target and drawdown

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