Moral of the Story? Drawdowns Are Inevitable!

There was a comment online:

“My advice to avoid drawdowns in your trading account: stay picky about entries, stay small, & trade your system not your emotional swings.”

I responded: If one does not want a DD (drawdown), don’t trade.

Some knucklehead responded:

“I’m sure your comment will bring all the boys out to the yard now!”


“You make it (DD) sound inevitable”

It is. Any other view is ignorance. Are you proposing to make money every month?

“Let’s see what the group has to say about that”

The group? Is there a lynch mob to kill reality?

“If I remember correctly, the post is all about advice to “AVOID” Drawdowns…”

Yes, to avoid DD – don’t trade.

“I will prefer to trade a profitable system devoid of emotions. I’m bound to make slight mistakes but my position sizing takes care of that!”

That’s great, you will still have DDs.

“If you average out your positions, with good knowledge, you can increase your winners and limit your losers. When you have more winners than losers, you profit.”

Are you proposing you will never have a DD? Ever? Positive every month?

“I’m proposing more winners than losers every month, Mr. Covel”

Why are you talking in circles? More winners than losers doesn’t prevent DD

“If the aggregate number of an individual’s trades in a month is 10 and he makes money 2% gain (each) from 7 of those trades and 2% loss from the remaining 3, will that constitute a drawdown?”

I walked away because I think I had a small stroke from his wayward thought process. He added later:

“I still ponder why he never really put up a follow-up response. Was I wrong? Does it really mean that individual traders MUST lose money from their trading account every month? How can one profit from that? What do you think about drawdowns on an individual’s trading account? Is it inevitable on a monthly basis? Can it be avoided? Can it be mitigated or beaten?

Brain dead.

You might like my 2017 epic release: Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets (Fifth Edition). Revised and extended with twice as much content. Out April 24th 2017.

3 thoughts on “Moral of the Story? Drawdowns Are Inevitable!

  1. History proves that only negative asymmetrical trading (option writing, LTCM, etc.) and outright fraud (Bernie Madoff) go several months/years without a draw down…until that very bitter end!

  2. I didn’t see that exchange but it sounds like something a new trader would say. With the software that is now available, it is easy to construct a trading system that shows a wonderful backtest with minimal drawdown. Often I suspect that inexperienced traders will convince themselves that if they start trading that particular system then the future equity curve will resemble the backtest. There are so many issues with backtesting to be aware of that some traders get fooled with their expectations going forward for a new system.

    Drawdowns are inevitable as well as a string of consecutive losing trades. Neither of these events are comfortable and may make some traders question their system. There are mathematical tools available to predict the expected maximum drawdown and maximum number of expected consecutive losing trades but I wonder how many new traders avail of those.

    Finally, it is easy to look at a five to ten year backtest of a system that generates a 20% annual return but has a 20% drawdown and convince yourself that you can live with that drawdown. However, a 20% drawdown is not the least bit pleasant and it can happen when the broad market is moving up. At that point, many new traders would abandon their system and look for a new one. Of course, the trading system may be broken but there are ways to determine that as well.

Comments are closed.