There is no way to avoid considerable drawdowns in trading, and May was probably one of the worst months I have ever experienced (in my systematic trading days at least). These drawdowns are painful of course, but they offer an important opportunity to retrospect in real life on the parameters (the pain related at least;)) of the trading system. Below is what happened, how I reacted to it and what were my actions and conclusions. If not helpful, I hope it’s at least entertaining.
In May my SPY system kept me short during a prolonged bull period and when finally it decided to go long – the SPY turned downwards. All in all, it went out of sync completely, resulting in a leveraged lost of 8.7% (a lost of 5.7% without leverage). That is certainly high, but looking at my back tests it is certainly not the worst month. Furthermore, even after this lost, the system is up 7% for the year, since only in April it enjoyed 12.5% gains (I didn’t have any problems “swallowing” that – think about ingrained biases in thinking). Examining the system back tests parameters, I still feel confident with it and am continuing trading it. For instance, the 10% drawdown is far away from the 27% maximum drawdown of the system.
The other “disaster” came from another strategy which I just started at the beginning of April. It is based on the Systematic Investor’s Maximum Sharpe Portfolio strategy. April was terrific – my variation of the strategy put me into SPY & EWJ. May, on the other hand, was horrible, really bad – at the end of April, the strategy dropped the SPY, extended the position in EWJ and entered a position in RWX (international real estate). While the Japanese market desperately needed a correction (it got one to the tune of 7%), there was no reason (except punishment for some past sins;)) why RWX should lose almost 11% in a month!
The only bright spot was my secretive ARMA strategy. Although it didn’t have an exceptional month, it put another solid performance.
To summarize, May was bad, very bad, but certainly nothing suggesting to change course. In other words, business as usual.