Working Money: With Trading Systems, Patience Pays Off by D. W. Pendergast Jr.
Itís been said that most traders will abandon an otherwise sound mechanical trading system after only three consecutive losing trades. Those who subscribe to such faulty reasoning usually miss out on the large gains available once the system finally begins to pull out of ordinary drawdown periods.
Youíve finally done it. The trading system youíve purchased or leased (or subscribed to) is ready to be deployed in your trading account. You already know all the key statistics in the systemís backtested and/or historical trade results, including maximum peak-to-valley drawdown, profit factor, average profit per trade, and number of consecutive winning and losing trades, among others. Your futures margin account has more than three times the cash value of the maximum historical peak-to-valley intratrade drawdown, and you feel very comfortable working toward the goal of successful trading with such a system. Even better, youíve already traded the systemís signals in a real-time simulator and were able to tough it out through a series of minor drawdowns.
As you place your first live trade with the system, you smile and say out loud, ďWhat could possibly go wrong? Iíve considered all of the possible contingencies, havenít I?Ē
FAMOUS LAST WORDS
The first trade goes okay; you make a few hundred dollars with only a minor intratrade drawdown between initial entry and final stopout. Another trade breaks even. Then a third signal ó and another winner. At the end of the trading day youíre up by $275 and are feeling pretty darn proud of yourself. You look at the equity curve of the past yearís backtested results and note that itís been more than a month since this intraday emini stock index trading system has had more than a $500 closed equity drawdown, but you donít fret much about that. After all, you say, ďThe system is in a really good groove and things should continue as they are for some time to come, shouldnít they?Ē