#012: HOW TO PREPARE YOURSELF FOR THESE TWO UNPLEASANT TRADING SITUATIONS
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DISCLAIMER:  Futures trading systems and commodity trading bear a high degree of risk. People can and do lose money.
Hypothetical results have many inherent limitations. Past performance does not guarantee future results. 

 

ACTUAL RESULTS SHOULD BE VIEWED WITH CAUTION, BECAUSE PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

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#012: HOW TO PREPARE YOURSELF FOR THESE TWO UNPLEASANT TRADING SITUATIONS

I consider breakout ATS strategies, especially those that are similar to my BOSS strategy, to be working, robust and timeless trading technique, which I really like and which still remains my current domain. During several years of live trading, I have experienced a couple of crucial situations that you should be aware of since the very beginning because they all are really realistic and can happen to you as well. Two of those I would like to point out in today’s article. If you will be prepared in advance, your trading will be much easier.

 

 

Case Study 1: ATS Stagnation

 

The number of ATS systems in my portfolio, that have been through stagnation, is quite high. It really doesn’t matter which time frame you trade. And it even doesn’t matter how robust the system is or what logic it is based on (I have compared a number of different approaches to automated trading). From time to time, every system will have a period of stagnation and you cannot predict it or avoid it.

 

How does this stagnation period look like?

 

On the picture below you can see a typical breakout strategy, build on the principles explained in my ebook called SUCCESSFUL ATS TRADER IN 10 WEEKS. I built the strategy in 2011 and have been trading it live since then. The stagnation period came in August 2013, lasted till December 2014 and looked like this:

 

 

 

As you can see, the stagnation period has really been long and it brings very strong uncomfortable feeling. Especially the beginners in ATS trading automatically expect the strategy to earn money regularly from the first day live. They don't even want to consider the possibility that the strategy might be in the beginning of stagnation period or even in the beginning of a new drawdown! Unfortunately, this is all part of trading (of any trading style, it is not only about ATSs) and you should be ready for it. Vast majority of my systems, which went through stagnation period, have recovered after all and made a new equity high (as you can see on the picture above). The fact that the strategy is not profitable for a couple of months doesn't have to mean that it is not working or that ATS breakout technique is not working as such! All you need is to be patient and have a realistic point of view. The thing that can help you is to diversify your portfolio across the markets and reduce the stagnation period, but it is good to be ready for coming stagnation period.

 

What have I done RIGHT to be always ready for a situation like this? It is simple: massive diversification across the markets and various strategies. This is the most important rule for stable profits in trading.


 

Case Study 2: Exceeded Backtest Drawdown

 

In my trading career, I have learnt a tough true: the drawdowns from optimization backtests serve really just for my basic orientation. I have been through situations when a strategy have created new, higher, historical drawdown.

Such situation you can see on the picture below. It is another classic breakout strategy, which I have been trading live since 2011. As you can see, the strategy had in 2014, which was the worst year in index markets in the last decade, gone through a solid drawdown that exceeded the one from historical backtests:

 

 

Situation like this one is really unpleasant and the lesson is that every time when you set up a realistic drawdown, it is important to look at the equity from OOS periods (as we know from SUCCESSFUL ATS TRADER IN 10 WEEKS ebook), or to use Monte Carlo analysis that can offer you more realistic image of what to expect in the future.

 

And what have I learnt to do RIGHT?

 

What I do in a similar situation is that in drawdowns like this one I reduce the number of contracts on given ATS.

 

As you can see on the picture, the strategy has recovered from the drawdown - and that can be applied to most of my strategies that have experienced new historical drawdown. You really need to be patient here and in some cases I decide to replace the underperforming strategy for the one which currently has better results. Such situations are not pleasant, but they realistically can happen so it doesn't make any sense to close your eyes and pretend this cannot happen to you. And again, the diversification across the markets is a really good way how to handle these situations better.

 

Conclusion

 

The conclusion of this article is that the holy grail really doesn't exist. I have experienced bad times in all trading areas - discretionary, options or spreads trading. Sometimes I experience them even when trading ATSs. But the ATS advantage is that in the moment like this you don't waste time - everything is automated so you don't have to sit and stare for hours at your computer screen and waste your time, you can, in the meantime, be productive.

 

This is one of the biggest ATS advantages.

 

Don't forget that the basic is to have a really quality portfolio.

 

Happy Trading!

 

Tomas

 

 

 

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