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Drawdown vs. Loss What's the difference? Is it possible to know the difference before your stop is hit? If you can tell the difference, how do you do it? When do you decide that it's really a loss, and not drawdown? Is it better not to worry about whether it's drawdown or a loss? Should you just set your stop loss, and that is all you need to do?

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A loss is the result of a single trade. Drawdown is the difference between a high and a low in the cumulative results of a series of trades.

 

UrmaBlume

 

I just looked this up for drawdown:

 

Drawdown Definition

 

Ok, I guess I didn't know the official definition of drawdown. I viewed drawdown as the amount of money that the trade would have lost if the trade had been exited at a loss, when it could have rebounded for a profit. So for example, if the trade was entered at 100, then dropped to 95, then rebounded to 110, I thought the "drawdown" was 5. You see what I'm saying?

 

So what would you call what I just described above? Because I've obviously been misusing the term "drawdown".

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It is practically impossible to enter a trade without it initially going to a loss. The only way to enter a trade without it going to a loss, would be if the order filled from the bid/ask shifting without the price actually moving. That situation can occur, but don't count on it.

 

So, my point is this: An initial loss on your order is almost impossible to avoid. So it is something that needs to be accepted, and dealt with. It's all about the never ending situation in trading about where to cut your losses.

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google- maximum adverse excursion - it will give you another measure to look at. :)

 

plus just because your stop is at a level it does not mean that you have to wait for it to be hit.

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One website states that Maximum Adverse Excursion only happens when the trade has a loss. Another site defines it in a different way. Then there is Maximum Favorable Excursion. I'm really not looking for either one of those. Those are statistic provided from backtesting. I'm looking for some kind of indication of whether the trade is going to go in your favor, after the entry, and some loss.

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I'm looking for some kind of indication of whether the trade is going to go in your favor, after the entry, and some loss.

 

the holy grail???

Some people apply a time limit, others a few bars, others just get out if it does not go in their direction right from the get go.... you choose.

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the holy grail???

Some people apply a time limit, others a few bars, others just get out if it does not go in their direction right from the get go.... you choose.

 

Those are all good conditions to have for a confirmation. Here are my confirmations:

 

  • First bar going in the direction of my order needs to show some strength. Needs to be a higher high for a long, needs to be a lower low for a short, or needs to be a bigger than average price move in my direction.

  • Hard price move against my order is a reason to exit.

  • If no sign of strength in the direction of my order within two or three bars, exit.

  • A strong price move in the direction of my order that turns and closes in the opposite direction on the same bar, is a reason to get out.

 

These are the kind of specific conditions that I'm looking for to make decisions. Being able to define my rules, will hopefully make the decision making easier. If the rule works, and the conditions are met, then act.

 

I should state that I'm using Traders Laboratory as a way to work through ideas, solidify my thinking and bring my trading rules to the front of my consciousness. Typing it out and posting them probably helps to set those thoughts more solidly and acts as a way to train those brain cells.

 

So if someone reading this wants to post their rules for a stop loss, then it may help you to recognize those conditions and make the trading decision easier.

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Long term trading success is not about instinct, divine inspiration or spontaneous intellectual combustion. It is about intelligent data processing and sound method.

 

If you are adept at handling, exporting and normalizing data there are a wide range of tools that can provide precise answers to questions such as those posed here - these are the tools the big boys use.

 

The right tools for the right job can make a lot of difference. There are many tools that can intelligently process huge amounts of data to discover precise rules, correlations and feasibilities in minutes that would take a manual processor decades to uncover.

 

In this case the most appropriate tool might be a rules generator, a decision tree or a Bayesian network. By the same token, given data and sample space, a genetically optimized neural network might produce a more effective, more granular output.

 

The practical application of such tools is discussed here, here and here. Those posts provide the names and sources of specific tools that may be of use and a discussion of how they are usually applied.

 

In the markets as in many games

 

Information = Equity

 

and in the markets the guy with the best information is the guy who makes the most money and he is also the guy who knows how to best process raw data into useful information.

 

If you are not processing at this level then you are not really competing at any level. It's not so much a question of whether you are using these exact same tools it is a question of whether your processing includes this depth of design.

 

cheers

 

UrmaBlume

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Long term trading success is not about instinct, divine inspiration or spontaneous intellectual combustion. It is about intelligent data processing and sound method.

UrmaBlume

 

I agree. I know nothing about MARS® (Multivariate Adaptive Regression Splines) or Neural Networks. It's interesting, and I have no doubt that it is very valuable. I have programed predictive curves using the Least Squares Method based on price. I haven't tried doing that with a combination of other inputs. But now you have got my brain cells vibrating a little bit here.

 

I doubt that I will ever use MARS® (Multivariate Adaptive Regression Splines) or Neural Networks. I guess I should never say never, but I'd need to look at the cost/benefit of getting that deep into the analytics. I'd be very interested to see performance comparisons of some big system compared to a similar methods and calculations in a good retail platform.

 

The data processing has to be based on something. A theory, conditions, a strategy, or observations. I'm not necessarily looking for a backtested condition that's been proven to a certain standard deviation. I'm all for that, and I hope to prove my system by that means eventually. But I'm just looking for the ideas that work in trading.

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If you are not processing at this level then you are not really competing at any level.

 

I now know that you are deep into cutting edge scientific methods of data analysis, so I'm assuming that you have references and data sources to back that statement up. ;) Sorry, man. I just couldn't resist the temptation. I hope you take it in the light hearted way that I mean it.

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