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1998issue C021-6

Drawdown limits before a trend system is allowed to trade

This case study follows a systematic trend-following book that fixed portfolio-mix, parameter-overlap, and a hard capital floor before a signal could trade, then judged later equity drops with a worst-path review.

  • Portfolio-mix was chosen before model code, and each program was held to a liquid book of 10 markets so risk was spread rather than concentrated.
  • Parameter-overlap kept only the strongest trending markets and the models that worked across the widest set, as a check against a large error in parameter choice.
  • A drawdown-limit in the form of a hard capital floor blocked the program below $250,000 because one large contract was too much risk for a smaller account.
  • Worst-path-review treated the largest historical equity drop as a path that could recur and separated giveback-drawdown from a series of losing trades before size was set again.
Entries in this reading2 entries
Current trackDrawdown limit68 readingsTrend following168 readings

A systematic trend-following procedure

The program was built as a systematic-procedure for trend-following. Its signal and abstention rules rested on the premise that markets can persist because of business cycles, policy responses in currencies, and weather-driven commodity supply.

The models were kept simple, with a small number of researched parameters, so the operators could know exactly what the procedure was doing and program execution as they believed trades should be placed.

Portfolio mix before model code

Portfolio construction came before model code. The first design cut was a liquid commodity mix chosen for diversification, and each program was later held to a book of 10 markets.

That portfolio-mix was meant to spread risk instead of concentrating it in a single contract or sector.

Parameter overlap and simple models

Model selection used a wide market sample of about 30 to 40 contracts, then kept only the overlap of the strongest 10 to 15 trending markets and the models that worked across the widest set of markets.

That parameter-overlap was intended as a robustness check so that even a large error in parameter choice would still leave markets and models that had already succeeded across many alternatives.

A capital floor before entry

A hard capital floor applied before entry. One program could not be traded below $250,000 because a single large contract made the associated risk too great for a smaller account.

Liquidity and future capacity entered the same risk bound. The book was designed so it could still be traded if the program later reached about $50 million, rather than being sized only for a small account.

Scheduled review and worst-path review

After a model was live, the operators scheduled a thorough review about twice a year of models, markets, and commodity mix, allowing only minor adjustments rather than continuous re-optimization.

Drawdown review treated the worst historical equity drop as a path that could recur. Worst-path-review distinguished a giveback-drawdown, a return of profits on a large winning trade, from a series of losing trades before judging how typical or extreme that drop was.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
6 of 22 in the Drawdown limit track
19981-6 pp.Next on Drawdown limitEvaluating trailing stops as two-parameter loss filtersEditorial reading: fix the initial Stop-loss order first so exposure is capped before entry, then choose how fast a Trailing stop may crawl toward price after a favorable excursion.
All readings on this track · 22 readings
  1. 1992Probability stops from winning-trade drawdowns
  2. 1994Monthly drawdown limits when cash competes with equity
  3. 1994Keep constant leverage left of the equity peak
  4. 1995Evaluate mechanical systems as a three-way fit test
  5. 1997Limits as a single trading decision procedure
  6. 1998Drawdown limits before a trend system is allowed to trade
  7. 1998Evaluating trailing stops as two-parameter loss filters
  8. 1998Walk-forward evaluation of a noise-filtered bond-futures breakout
  9. 2002The pattern-day-trader equity floor as a leverage governor
  10. 2003Evaluating a one-rank mutual-fund switch
  11. 2004Keep entry, exit and abstention balanced as one procedure
  12. 2006A stated daily multiplier is a risk contract, not a return promise
  13. 2007Walk-forward probation for intraday systems
  14. 2008A mechanical futures procedure is unfinished without a drawdown limit
  15. 2010Evaluating mechanical index timing under drawdown limits
  16. 2013Predefined small losses outrank market analysis
  17. 2013Equity-curve filters as drawdown brakes
  18. 2014Critique of chasing recovery after a large drawdown
  19. 2015Loss thresholds and equilibrium as trade filters
  20. 2015Constructing mechanical systems under a drawdown cap
  21. 2018Evaluating system rules for robustness and livable drawdowns
  22. 2020Regime-aware equity halts and volatility entry filters
By fieldDrawdown and survival54 readingsBy year199891 readings
All 68 readings tagged Drawdown limit
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