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How do Algo Traders deal with Drawdowns?

In my last post, I wrote about how to continue to ensure that your portfolio can continue to thrive... shortly after this, the portfolio started to drawdown - those worst monthly for over a year. Drawdown is when your account starts to take a series of losses before (hopefully) going back up again. If you're a seasoned trader, you'll know that drawdowns are a perfectly normal part of trading.. a trader is always trying to minimise drawdowns and maximise profit... anyone showing me a perfect looking equity growth chart will be knowingly (or unknowingly) showing me a martingale / grid type system, a low take profit vs high stoploss system or something where the risk totally outweighs the profit potential... most people who use these trading systems will eventually end up blowing up their accounts.

Going back to drawdowns, as an algo trader.. we don't worry about the human element which for manual traders can be a big issue... if we are taking more losses than we are expecting and causing our equity to drawdown, then the simple fact is that the markets have changed and our algos are out of sync. Markets are constantly evolving and changing.. news, economics, market participants all change and this changes the structure of markets.

In the month of May, our porfolio suffered the worst drawdown it's had in more than a year.. 4.18% loss on the account. We've made some adjustments on the portfolio and so far, we've recovered about half of the drawdown (we've recovered 2% so far)

As per my previous post, making adjustments to the portfolio is how we intend to keep this performing. However, when you take losses, you need to give it a bit of time to see if your algo is indeed failing or if you give it a bit more time, will it recover from it's drawdown naturally... sometimes markets are only momentarily changed due to some short term news events. For each of your algos in your portfolio, you should understand it's metrics - average win / loss ratio, max concurrent wins / losses, max stagnation time etc. Once you see the algo start to deviate outside of it's parameters... then it could be time to swap out these algorithms for others.

And this is exactly what I did... I have 300+ algorithms running in incubation accounts.. these are running live all the time and I can see which ones are performing and which are not.

As an example, one of our algos which trading the NZDUSD pair had been doing very well but as you can see in May below.. 7 straight losses.. this is abnormal expectation and I immediately removed it

We had another trading algo which was trading GBPJPY successfully but in May, it's performance looked like this:


Just way too many losses compared with the wins I'm used to seeing on this.. so this was also removed.


Looking in my incubation accounts, I saw an algo which was doing very well trading EURGBP



And there were a few more like this which performed well trading GBPJPY and EURUSD in the incubation accounts... these were also added.

The ones which were removed in the main portfolio are not discarded for good.. they are still present in the incubation accounts and monitored. If they start performing well again, then they pop back into the portfolio.. so long as we're not top heavy on any one particular forex pair.

We cannot control the markets, only how we respond and adapt... nothing in trading is guaranteed.

To learn more about our trading porttfolio on Darwinex, you can check it out here: https://www.darwinex.com/invest/YFC

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