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Comparison of results based on the smallest losses during trading

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  • Comparison of results based on the smallest losses during trading

    Comparison of results based on
    the smallest losses during trading
    (Smoothest yield curve)


    As you know, Murphy's laws operate on the market ... Almost every system, after the start of real trading with it, falls into a loss-making phase. For traders who have not yet had significant personal experience of taking losses , comparing the results of systems based on the minimum size of losses during trading can be an excellent method of choosing a trading system that will be optimal for him personally.
    The period of loss of a system is the longest period between the peak of the yield curve and the next bottom. This period may include profitable trades if these trades did not lead to a new, higher peak, and the yield curve subsequently dropped to a new, deeper bottom. There are two ways to determine the largest losses, none of them is "more correct", however, traders usually gravitate towards either one or the other definition:
    1. The largest drop in the account, expressed as a percentage of the account.
    2. The largest drop in the account denominated in dollars.

    Traders of different types gravitate towards one definition or another. The line of demarcation between these types of traders is usually their professional goals. Those traders who want to become fund managers and professionals close to them usually limit the size of the maximum loss on the account to 20%. The most successful professional traders limit their maximum loss to less than 30%. Loss-making funds usually lose clients. For institutional clients, the smoothness of the yield curve is often more important than the ultimate income. It also gives bad press. The maximum amount of losses on an account is often used in the analysis of various funds by journals.

    For traders who do not intend to become fund managers, it is more important not the percentage of maximum losses, but their dollar expression. In any case, this is a matter of personal choice.
    The analysis of systems based on the minimum size of losses is important from a psychological point of view. It is much easier to follow a system that does not have large unprofitable periods. Many traders suffer losses because they fail to follow a well-tested trading system. Having a system with little loss in history makes it easier to use in difficult times.

    The only major drawback to this approach is profitability. Often, limiting losses means limiting risk. Limiting risk usually leads to limiting profits. Despite the prevailing judgments in this area, limiting the system's profitability is often the right move. Often, professional traders limit the risks to their accounts and miss out on potential profits in order to achieve a smoother and more stable yield curve. It is often more comfortable for traders to observe slow but steady growth in an account than to take significant risks to maximize account growth.
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