Adrian Reid explains how to decide whether to exit trades during a drawdown: compare current losses against 10-20 years of backtest data to see if they're within historical bounds, check if win rates are degrading, and investigate causes like indicator decay. A 30% drawdown when your max was 10% signals a real problem; matching your previous max suggests you can stay in.
So if you, if you have a strategy or a system that you've back tested over a long period of time, what you want to do is look at how it performed over different periods of time. So let's say you've had.
Three weeks of drawdown.
If you run a backtest over the last 10 years, 20 years, how much data you've got, you can look at all of the three week periods and say, okay, well is a three week drawdown common? Does that happen or is that new? If it's new, you absolutely have a problem. If there's never been a drawdown that long, but chances are it's not new and it's very well within the.
Bounds of what is normal and expected by the system. So when you've back tested, you've got enough data to say, is this, so you run the whole backtest and then you're looking at the current performance saying okay, well I'm in drawdown, is that normal? Should I stop the system? You've got all of this performance to use to say is this normal? Can I find this behavior in this backtest? So if you're, if your current drawdown is 30% and the maximum previous drawdown was 10%, you have a problem. If current drawdown is 25% and your maximum previous drawdown was 25% or 26%, you probably don't have a problem.
But once it exceeds what is normal from the backtest perspective, you need to really have a close look at the system. You want to look at all of the performance measures, understand what's shifting, what's changing, and evaluate whether there's something deteriorating. Like if you might find, for instance, sometimes an indicator becomes less effective because too many people are using it. This is a common one. This happened to short term RSI in the US stock market back around 2009, 2010, something like that, it became much less effective than it had been previously. And what you find when you dig into it is that the percentage of winning trades was falling.
And when the percentage of winning trades is falling and it's on a trend downwards, your system is in trouble.
In a little further, don't just look at the headline performance. I mean, yes, if your drawdown is bigger than expected, you probably have a problem and you should at least pause or suspend the system and investigate. But when you look at all of the other performance measures, you'll probably see whether things are degrading systematically or not.
Sam.
