Drawdowns are supposed to happen
StatsEdgeTrading
Being in drawdown is no fun. I know. I am in one right now on a couple of my systems and if you have been trading for any real amount of time, so are you.
But it is important. Because if you are not in drawdown at some point, you are doing something wrong.
What do I mean by that.
Every system. Every trading style. Every investment. Every hedge fund. Every part of life has ups and downs. A weight loss journey has plateaus. A strength training journey has injuries. A relationship has fights. A child has tantrums. If you are trading anywhere, or listening to anyone, who is not honest about the fact that they have drawdowns — you have to run. If all they are ever showing you is amazing trades, amazing weeks, amazing months, they are selling you a dream that is unattainable.
Once you internalize that there is no way to do this perfectly, it is actually very liberating.
So let’s take a step back and think about why everyone is so worried about drawdowns in the first place. In my experience it comes down to one of two things.
The first is that they are too reliant on immediate trading wins to fund their lives. And here is the truth — no one in the world can be guaranteed or promised that the system they are trading, the edge they think they have, or the gut feel they have developed, is going to produce profit next day, next week, next month, or next quarter. Nobody. If that describes you, that is the first thing to fix, regardless of where you are in your trading career. Your survival cannot depend on the very next trade working.
The second reason, and I think this is the more important one, is confidence.
When you come into trading and you are hitting the button every day — on your phone, on your laptop, on your six-screen monster machine — and for an extended period of time you watch your account bleed, the next logical question your brain asks is: for how long? At what point, at what time, am I going to be out of this?
For a discretionary trader that is a very hard question to answer. Because it is very hard to track human decision-making back over a long period of time. You cannot really prove to yourself that what you are doing this month is the same thing you were doing two years ago, let alone what it is going to do over the next twelve.
For a systematic trader, it is much easier. Because we have the data. We have the backtest. We can look at what the system did in every regime the market has ever thrown at it.
That is the whole point of what I do at StatsEdge Pro.
Unless I have seen a system’s data going back 25 years, I do not trust it. Someone could have an amazing real-time track record for a couple of months and that proves absolutely nothing. Markets change. Regimes change. Having long-term, backtested, raw data is really the only tool we have.
When I can watch my systems through 2000, through 2008, through 2020 — I know what to expect for every type of market that has actually existed. And that is what lets me hit the button every single day. Not because I know the next trade will win. But because I know that if the system handled the dot com crash, the GFC, and the COVID liquidation, it will probably handle whatever is next too.
That is the confidence. And that is the thing that carries you through the drawdown.
So if you are in one right now, I get it. I am probably in one too. It is fine. It is supposed to happen. The question is not whether you can avoid them. The question is whether you have the data to trust your process while you are in one.
If you want that kind of clarity in your trading, try trading with systems. Or come have a look at what I am doing at www.statsedgetrading.com.