#282: Managing dreaded drawdowns

Simon Shares

• Local markets have been making new all time highs and right now the sellers look shell shocked and unable to exert any real downside pressure.
• Taste (JSE code: TAS) results were just a shocker and they need money fast, real fast.
• Pick 'n Pay (JSE code: PIK) results were uninspiring. Like for like sales after inflation went down as they continue to lose market share and operating margins remains very weak at 1.6%.
• Calgro M3* (JSE code: CGR) not bad is we strip out the funnies. Memorial parks coming along and Western Cape drought hurting a bit as is the weak economy. I reduced exposure at the the time of three finance ministers in 4 days in December 2015 and am not upping my exposure for now.
• Long4Life (JSE code: L4L) at 550c starts to get interesting and offers an important lesson - careful of chasing hype.
• Up coming events;
  • FX – Wealth Creator or Poverty stamp
  • The Traders Life: The tools
  • High probability derivative trading
  • Position your portfolio for 2018

* I hold ungeared positions.

Managing the dreaded drawdown

Every trader will at some point have a drawdown when a string of losing trades sees your once lovely equity curve head south. Or worse an ugly equity curve get even worse.

Typically the gut response is to either; change system, tweak the system, reduce trade size or just panic. None are a good idea.

August saw me have a horror week with four large loses (within system expectations, but not expected all at once). My immediate response was some Amazon shopping but then I got into my drawdown mode.

First I check every trade to make sure I did everything right. Now every trade I do is marked for a 'perfect trade' but I double check. I also go back to my initial system checking and see if this was expected. I use the Mark Douglas method of system testing and this process is very important. Firstly it gives an expectation of what the system can deliver, tests if it works and also shows what sort of drawdown you can expect.

The point is drawdowns are a part of trading and veery trader will have many of them over a life time of trading. We need to expect them, manage them and not have a knee jerk response to them.

I was interviewed by Duncan McLeod from TechCentral on local and offshore tech stock, interview below or here.

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