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Portfolio123 » List all forums » Forum: General Comments » Thread: Quant trader support group? |
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Total posts in this thread: 3 |
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dwrowley
Advanced Member
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Well the last few weeks have been... interesting. It certainly tests your intestinal fortitude -- volatility is NOT for weenies. How are the lessons of the last couple of weeks making you feel about the quant approach (ie. P123)? Is this just a standard (but more severe than normal) correction, like there was May '06? Or is it something more now that there is so much money traded automatically in hedge funds, driving volatility much higher than historical data would ever show? Right now I'm primarily thinking about preserving my capital to live to play another day. I'm down 30%, with multiple stocks taking 20%+ hits per day. I've never seen anything like it. I now have stops on all my trades - but I feel like I'm closing the barn doors after the horses have bolted. I'm concerned I'll miss the rebound if I'm in cash, but at the same time, enough is enough. The hedge strategy on IWM that I put in place a few months ago has been all but worthless, since my ports are down FAR more than IWM. Denny et al. - do you have advice for the less seasoned traders in the group (ie. me :-)) as to how to navigate through these treacherous seas of volatility? Stay the course? Move to cash? :-) Maybe I'm just being a weenie... David |
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awgreig
Member  UNITED STATES Joined: Mar 25, 2007 Posts: 16 Status: Offline |
This is a 3+ std. dev. event. Now in a normal distribution that would mean this would happen once every 4.5 years or so. Sadly, the market is not a normal distribution but one with fat tails. So this occurrence actually is about once every two or so years. The answer to your question is what your testing shows your maximum drawdown is likey to be. If your sim shows 28% assume that it could easily be 35% this time. If that is too much I would suggest lightening up or going to a larger cap sim. No easy answers here I am afraid. Most people get seduced by the 30% returns and ignore the 25% drawdowns. Does not look like much on a log equity curve but once you are in it....... Good luck and as somebody once said, "Sell unitl you can sleep" |
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dwrowley
Advanced Member
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For me, I think the thing that caught me off guard was the fact that I *thought* I was hedged. I failed to realize that there was only limited correlation between moves in the Russell and moves in my portfolios. Also, given that I'm trading 5 ports, my simulations showed a blended DD of only about 15% -- so to catch a 'perfect storm' situation like this was something I really didn't expect. In the future, I think I'll apply a more disciplined approach of trailing stops (giving each stock quite a bit of room - say 30%). I'm fine with 30% DD's in general, as long as they don't become 50% DD's :-) Cheers, David |
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