BarroMetrics Views: In Ebb Phase
Continuing on from a ‘A Tale of Two Traders‘….
I have been asked on many occasions: “Ray, how do you handle prolonged drawdowns?”
I reframe the question to: “How do I handle Ebb Phases?”.
Well, on the risk management side, the first thing I do, is cut down size and reduce my maximum loss from around 2% to 1% (of capital). If the Ebb Phase is a prolonged one, I take frequent. And, if the phase is particularly protracted, I’ll reduce the maximum loss to 0.5%.
The risk management side is the easy part; the harder aspects are the ones involving Mind and Method.
So far as the ‘Mind’ is concerned, I believe it is important to keep positive and confident. Easy to say, much harder to do when in Ebb Phase – remember that it characterised by the fact that it feel like anything you do will turn out ‘wrong’ in hindsight.
For example, I had long positions in the GBPCAD. Figure 1 shows the stop and price action. Figure 2, shows what happened subsequently. Enough to make a grown man cry. With benefit of hindsight, the entry and/or stop were incorrect.
You may ask, ‘why did you jump in when the GBPCAD showed its strength?’ Because I don’t trade that way. I need certain things to happen before I take a trade.
On the Method side, I ask the question: “What assumptions are underlining the price action? Do I have to change my methodology because of them?”. For example, for the cash S&P, from March to October 2011, the monthly ATR was 92, and Mean Volume was 637,224,843. From Dec 2011 to date, the monthly ATR was 80 and Mean Volume fell to 372,113,320.
Within my methodology, this up move would be treated with suspicion.
In 2012, my expectancy return showed an ebb phase but only in my stock index trading. I formed the view that QE had distorted the price action and I had either to be ‘long or out’.
Yep, Ebb Phases are a pain, especially to our wallets. The trick is to wait out the phase while containing the financial damage that comes from it. The great thing is that for every Ebb Phase, there is usually a Flow Phase. We just need to remain solvent enough to take advantage of it.
FIGURE 1 Stop
FIGURE 2 Aftermath