Stock Market Explorer

Posted on 17 Oct 2008

It never ceases to amaze me how people put strange verbal terms to things that would otherwise be very painful. Let's take the trading term "Drawdown" for example. What on earth is that supposed to mean? I can tell you this. When I lose money, I lost money. it's just that simple.

You can call it anything you want, but somehow, calling it drawdown seems to make it all better again. Yes, drawdown is a forward looking term and those of you who know me, know I approve of future thinking. it's always the question, what is developing now, that makes the future likely to be as anticipated that makes all the difference in my trading.

If i'm trading a trading system I developed, my first thought on parameter selection is what is the market condition likely to be in the near future? Will it be more volatile? Will it be choppy? it's this kind of thinking that helps me to decide which systems i'm going to be trading tomorrow and with which parameters.

I will run tests that show me how the parameters shift under various circumstances and i'll anticipate this. it's this kind of thinking that has made a huge difference for me; anticipatory thought.

But the term "drawdown" also carries with it, without regard to your method or its viability, the seemingly all saving idea that you'll recover from where you are. After all, it's just a drawdown. Well, if it went down, it certainly will in all likelihood go back up, right? After all, the great master did say, as you believe, so shall it be done.

So is "Drawdown" really a dangerous word to be using? Yes, I believe it is. Because it ignores that larger picture of what really is an efficacious approach to trading. I think it's a conspiracy against newbie traders to keep them from realizing the big picture of money management.

If you really want to get real about it, go read this techno babble that detaches it even more from the experience - www.en.wikipedia.org/wiki/Drawdown_(economics) - of losing real money. After getting your PhD in detached financial verbosity, you might be able to get a job teaching trading to a bunch of unsuspecting students to try to pay back all the money you lost trading in the real world ;-)

Traders have to deal with reality every day. If not winning, then you certainly are losing. it's just that simple! Trading is the most basic game in the world, but it requires a solid understanding of oneself and the environment around you. Challenge the terms that are being presented to you and the environment you operate in as a trader and free yourself from biases that can keep you down.

Rob Mitchell is co-owner, researcher and head trader at EminiForecaster.com , an internet site specializing in cyclical stock index swing trading. For more articles like this go to my blog