125: Are your trading strategies sick or healthy?

10/06/17 • 9 min

In this weeks ‘Trading thought’ we’re going to discuss an issue that all traders have to face...

How do you know when to stop trading a strategy?

A common approach is to wait for a strategy to reach the maximum historical drawdown and then either stop trading the system or look at modifying it or optimizing it, but...

There are a couple of problems with that approach:

Once the strategy has hit that drawdown level, the damage is already done, you’ve already taken a series of losses to get to that level,
What if you stop trading the strategy and it recovers from the drawdown, you missed out on the recovery.

When we have a system that goes into drawdown, we never really know if it’s the beginning of the end for that strategy or if it will be a drawdown within expectations, so it can be tricky issue to address.

Can this be managed differently?

Are there warning signs to watch out for that can tell us if our strategy is sick or healthy and can we manage these sick strategies differently without having such an impact on our trading accounts?

In this episode we’re going to hear from Alan Clement, who is going to share some ideas on measuring system health, so take a listen to our chat with Alan.

Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.

In this weeks ‘Trading thought’ we’re going to discuss an issue that all traders have to face...

How do you know when to stop trading a strategy?

A common approach is to wait for a strategy to reach the maximum historical drawdown and then either stop trading the system or look at modifying it or optimizing it, but...

There are a couple of problems with that approach:

Once the strategy has hit that drawdown level, the damage is already done, you’ve already taken a series of losses to get to that level,
What if you stop trading the strategy and it recovers from the drawdown, you missed out on the recovery.

Can this be managed differently?

Are there warning signs to watch out for that can tell us if our strategy is sick or healthy and can we manage these sick strategies differently without having such an impact on our trading accounts?

In this episode we’re going to hear from Alan Clement, who is going to share some ideas on measuring system health, so take a listen to our chat with Alan.

Previous Episode

124: Managing Trades with Linda Raschke

Trade management is a critical component of a trading strategy.

It can often be the difference between a profitable trade and a loss...

However many traders focus on the entry only and leave trade management as an afterthought.

In episode 49 of the podcast, Linda Raschke, said "trade management is probably the most neglected area of system development".

In that episode we focused on Linda's approach to modelling the markets but in this episode Linda is back to discuss trade management and exits, including:

Why trade management is such a neglected aspect of trading,
How to model different types of exits and the impact of market environments,
How volume and breadth measures can give clues to the tone of the market, and
How to use the power of relative strength to target the best markets to trade.

Next Episode

126: Protection in a market downturn

It seems from the emails I’ve been getting lately that more and more traders are becoming concerned about the state of the markets, especially the stock markets, which is understandable.

And the concern is really around what’s going to happen when the stockmarkets start falling.

What could happen to their strategies and accounts and how can they prepare for it now?

How can they protect their portfolios?

One form of protection that often comes up is using diversification to reduce portfolio risk.

However, a common question that is raised is how to actually go about diversifying?

Is there more protection in diversifying across markets, or staying in the same market and diversifying across strategies?

In this short piece of audio, Perry Kaufman discusses how he looks at diversification, and it’s something you may want to consider when you’re thinking about how to protect your own trading account and portfolio in a market downturn.