This is a Guest Post by AK of Fallible
AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.
Drawdowns are very difficult. Peter Brandt understands this. He’s had some very large, extended ones… and he’s a market wizard! He’s been a futures and forex trader for 42 years and has some amazing, consistent returns over that time period. In this video Peter will help us discuss drawdowns on how to deal with them.
Drawdowns are inevitable regardless of your strategy. It’s a statistical fact that they’re going to happen. There is no such thing as a strategy that wins all the time. Markets go through cycles. And depending on the part of the cycle, certain strategies work better than others.
An example is momentum vs value. Momentum strategies work great in late stage markets, but may not perform as well when we’re coming out of a bear market. Value on the other hand works the opposite way. It may perform great during the early period after a bear market, but not as well in a late stage market. So regardless of your strategy, you’ll get a drawdown.
There are two ways to look at a drawdown. In terms of depth — how much you lose in total — and also in terms of length — how long before you’re making money again. You would be lucky to have a short duration drawdown. It becomes very difficult when the drawdown is extended. You start losing faith in your strategy and that makes you want to break your rules and do things that will hurt you even further.
How do you deal with drawdowns? Are there any strategies you prefer? Let me know in the comments!