I have seen you mentioning about DD a lot, I did not look at this concept until now because I was not active until now.
Also in investing, the concept of DD does not apply if the stocks are meant for long term, and if any it is the opposite, I invest more after a big fall if I have conviction in the business.
Now that I am into active trading I guess I have to look at DD after a while, and since I started trading again, market more or less has been up, so on a PF level, not yet felt any kind of DD, along with the fact that no single trade’s loss is more than 10%. So in that sense, if any and every trade’s loss is 10%, then my overall loss at PF level will also be 10%, which I can afford, what do you say?
but why trade bank nifty. I tried technical analysis and fundamental analysis too. The chart doesn’t make sense at all too much noise , too much randomness and news events. You would have been better of with nifty FUT or MCXBulldex or crude oil.
Considering the losses he faced, his state of mind, I ask you to provide a detailed plan on keeping the losses short, whichever way possible. Because I think you are the only one who said to not stop trading like this.
If not here, you tell this in the message, as you have seen how he trades.
Yes, maybe it does not matter to most buy and hold people. Did not matter to me too and with index, buy on crash is a good thing to do if you can hold it for long term and through ST pain. Stocks need more expertise and their is always risk of value trap.
But as such i think it does matter. Returns are always in perspective of risk. If i can actively invest and perhaps make slightly less than Nifty but do much better in risk - say losing only 20-25% when market tanks 40% then that has value. Closer we get to retirement, better it will be to manage downside volatility in portfolio. Similarly someone may make more than index with leveraged investing but not look at risk and then go belly up once market gives 50-60%DD.
I can see why most need not look at this - but even for them portfolio diversification and allocation rules can probably give better returns vs risk. Anyway i have not done any work here yet as focus is on ST trading.
You will have a series of trades, wins and losses. After booking a loss you will use freed up capital to take next trade too. So drawdown path can be more complex. Just note down peak capital and compare it with current capital - this will give you current DD. Ideally we need to backtest and check the worst phases in past and use that to manage position sizing. For investing type systems, perhaps M2M also matters, anyway this is upto trader to decide how he wants to measure risk and what makes sense to him.
Main aim of managing DD is to avoid blowouts and to reduce pain during bad phases, also to keep risk in control when system stops working completely. 50% DD will need 100% returns from next system to breakeven. Another reason to track returns/maxDD is to use it as a comparison tool when comparing systems and when trying to check whether any rule helps improve a system. This is just one parameter to look at among others, but perhaps most important one.
Your experience and perspective speak for themselves, I understand that completely.
And I am not a novice either without any perspective whatsoever but trade with a blind belief that he has the Midas touch, and that he will always be in profits
The emphasis you put on DD has to to applied wherever applicable, and your repeated mentioning of different systems is also to be noted.
On a different note, in investing, at times, people making a killing utilizing the DD, when they have great conviction with their stocks, follow some valuation model, know a lot about the company, fairly certain regarding the margins being sustainable, wait till the froth at the top is gone, wait till weak hands sell, so to speak, and then add a lot to their position size. Of course sometimes this could be a value trap, but experienced folk do this, very tough capital wise and emotions wise but equally rewarding if the tide turns.
You can also tell him how to automate the process, if it is possible, so as to take the emotions out of the equation, be systematic and restrict losses.
I have made many mistakes, some i paid for and in some i just got lucky. Even 3 years ago, i did not really understand leverage well. When i first transitioned from discretionary to mechanical, i did not think to put any limits on risk for the day. Just take all trades as per system. At one point i think i was taking 30 odd open positions with 1/2 % risk per trade. Historically it did ok, but it was too much risk and too much leverage. Thankfully, SEBI rule came soon and forced me to look at it, turns out putting trade cap did not affect returns much and reduced risk well.
Yes, in the end we have to do our own work - we have to use our own brain and look at what makes sense to us while also trying to double check whether we are wrong and don’t make fatal mistakes. Warren Buffet apparently holds large % of portfolio in concentrated positions and obv it works well for him.
Yes, a lot of emphasis is put on returns, and not on risk.
When one is young, one does care about capital loss at all, and perhaps rightly so, because time is one his side, and even if the capital evaporates, he can still rebuild. But as you grow old, and the deployed capital is substantial it makes sense to gain small and lose small, and eventually capital protection will be first than returns.
Just like riding on bike from city A to city B which is 100 KM away, a young man wants to reach in 1 hour, a middle aged man wants to reach in 3 hours, an elderly man wants to just reach
We see this with mutual fund investing, a lot of times young people say that they have high risk appetite, but when it really happens, if their investments fall by 20%, not of all them can digest it. Psychologically too, it is said that loss has more impact than gain.
Even I have started leaning towards making stop loss an integral part of trading, restricting losses, and hoping to minimize loss as I gain experience.
taking strangles overnight is a big risk , a samll gapdown/ gapup opening will end up minor profit meanwhile big gap like 100 + pts usually ends up in huge loss.
these iron fly condor all works well when nifty range is around 50- 100 intraday , more than that its always red either small or big based on the timing of the entry. These neutral strategies has to be held for 2 to 3 days atleast with the hope that nifty lies within range else holding for longer period too is waste.
(mostly)only way from profiting from these neutral strategies is one needs to adjust the positions and some times change condor to spreads at right time
@Vikii In future before you trade, work on how to change neutral strategies to directional and directional to neutral when market changes direction. If you do this, every time you can enter with confidence and mostly will end up with profits and off course losses will be there but very minimal.
Gap of 100 + points is very common. They only cause loss in strangles if the strikes are close to the money.
If you sell weekly strangles on Nifty/BankNifty that are 5% away, you make money 80% of the time. You also don’t lose much when there is a gap up/gap down of 1.5 - 2%.
1 lot of strangle requires 1L+ 5% away from spot is literally 800 pts incase of nifty … you literally make nothing out of it as a retail. its mere 1.4% per week.
if you take today example 5% away from spot has a premium of 12 to 15 at opening.
this might work well for someone who has fulltime job and want something called profit with no risk or HNI’s who has crores.
yeah including rare losses and breakevens and charges one can mint somewhere 40 to 50% above p.a. which is why i said this might be good for someone who does this part time and look for profits. but for fulltimers its not ideal.
its upto them one who wants profit and one who wants income.
