Your drawdown might not be real.
Drawdowns part two: the reconciliation, the hardest question, and the best firing I ever got.
The first thing to do in a drawdown is embarrassing in its simplicity. Run the backtest up to today. Sometimes it’s sitting at new equity highs while your account bleeds, and that means the system is fine. Your execution drifted. Phantom trades, missed fills, slippage that crept up. Dump both trade lists into a spreadsheet, line them up, and find where they break. Five trades out of a hundred can be the entire dent. It’s boring accounting work, and the relief when you find the bug is instant, because a problem you can name is a problem you can fix.
The harder case is when live and backtest agree and both point down. Then you’re facing the question with no answer: is the edge gone, or is this noise? Nobody knows, and anyone who claims a formula is selling something. What helps: out-of-sample testing to build confidence in your process, knowing what edge you’re actually exploiting so you can ask whether the world changed, and version control tight enough to know whether the tweak you made three months ago is the real culprit.
Dave’s line from part one still holds. No trader has ever quit at equity highs. The whole point of this work is to still be there when the curve turns. Ours turned plenty of times in 26 years, and every one of those drawdowns is published, not hidden.
If you want systems where the reconciliation, the sizing, and the drawdown reporting are already done for you, that’s Stats Edge Pro. $149.99 a month, 30-day money-back guarantee.
Michael Nauss, CMT, CAIA, CDMS