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Equity Curve Drawdown and Commitment
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All trading and investing methods must deal with the inevitable drawdown from the most recent peak in one’s equity curve to a bottom before reversing and potentially making a new high. Seasoned systems traders are well familiar with the drawdown phenomenon and the importance of drawdown as a percentage of annual average returns in evaluating a trading system. On the other hand, many “investors” that follow a “buy, hold and hope” approach to the markets for the long term, don’t think in terms of a drawdown when their portfolios drop in value by 10%, 20%…75%, as has happened in the past few years. But nevertheless, what they have experienced is an equity curve drawdown.
Systems traders know that if they are following a “good” system that potentially gives them a winning edge, in order to “cash in” on what that system has to offer, they must have a strong commitment to following each and every trade recommendation, even if the system is currently experiencing a drawdown. They are emotionally and financially prepared to do so because they already know the historical maximum drawdown that the system has incurred before making new equity highs. They also know that the worst time to abandon a system is just after a drawdown and just before it potentially surges to new highs.
“Buy, hold, and hope” investors, on the other hand, are committed to holding no matter what. But that commitment is misplaced, because “buy, hold, and hope” is not a winning methodology. Commitment without a “good” system, or a “good” system without commitment, are both recipes for failure.
You need two things to potentially win. A “good” system or methodology and the commitment to follow it without fail especially through the inevitable drawdown periods.
Good Trading,Bill Pouloshttp://www.instantprofitstoday.com
About the Author
Bill Poulos has been trading the markets since the mid 1970’s. In 2001, he formed Profits Run, Inc, with his son, Greg, to help educate traders around the world by offering trading courses and systems.
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