Only Low Risk – Low Drawdown Investments



Money Management: Deleverage a Fund

 

How to " Deleverage " a fund

 

The Money Management is very important and very connected to our psychology; let see an example in order to understand well this concept.

Suppose that we find an investment that we see is profitable but we see that is very volatile and expose our investment to big drawdown. You know that this is not my kind of investment anyway I just take it as an example.

We take some table from Myfxbook:

Link of Myfxbook : Phantom 

 

Performance of year 2013:

Performance2013

 

Performance of year 2014:

Performance2014

 

So we are not here do discuss the strategy (maybe you already seen my post on that) but we just examine the data and as I always see real accounts wit real data this can be useful as example.

So now what we see is :

1: The Drawdown is unacceptable 75% !!

2: In general the performances are pretty fine, this is mathematic not opinion… let see :

Gain in 2013:

+12,2% +56,32% +57,22% +43,78% +35,09% +49,86+ 19,59% +22,59%=

+296,65% in Total in 2013

 

Gain in 2014:

-73,83% +48,34% +29,93% -75,54 +33,37% +56,78% till June=

+19,05%.

 

So how we can invest in a system that is profitable but we've also seen a drawdown of -75%? We don't want risk so much!

The answer is money management! With money management you can modulate the risk as you want and delevarage the investment.

 

We want invest in this fund but to reduce the drawdown

 we will deleverage  the fund by 10

in order to stay more conservative!

 

Indeed what you think if the 75% of drawdown become 7.5% ? Can you sustain a month with a loss of 7.5% instead of 75%? This is the key!

Now you have 10.000$ that you want invest in the system. We suppose to invest in January of 2014…. we have been so lucky that as soon we enter in the system we got a -74% ….argh…! Anyway let see how we do the calculation.

We open 2 accounts: These two accounts work in tandem and are our investment.

You put the 10.000$ in the 2 accounts in this way:

Account #1: 9.000$

Account #2: 1.000$

To work with money management you must follow these rules and never break them!

The account #1 will be your PARK account, there's no trade here!

The account #2 will be the account where there's the activity of trading.

 

Your investment is 10.000$

 

park

 

So in this way at the end of January what we have in our investment?

Account #2 is -74% = 260$

So now our Investment Money is : 8.260$ that is just -7.4% very different than a -74% in that case we had 2.500$ !! Who will stay a month again in a similar investment? Taking control of drawdown allow us TO STAY in a profitable investment even we have losses because the losses are not so hard!

Now you go to your Park Account #1 and you pull out 740$ to put in the account #2 so yo have:

 

Account #1= 8.260$

Account #2= 1.000$

 

At the beginning of a new month your Account #2 must have 1.000$!

Ok so now in February we have finally the first profit month: +48%

And this is the situation at the end of month:

 

Account #1= 8.260$

Account #2= 1.480$

 

So now we repeat the cycle :

At the beginning of a new month your account #2 must have 1.000$, so as we have a profit we pull out some money from account #2 the 480$ of profit

 

Account #1= 8.260$ + 480 = 8.740$

Account #2= 1.480$ – 480 = 1.000$

 

In March we have around 30% of new profit so again you pull out 300$ from account #2 that come back to 1.000$ and in our Park account we have 8.740+300=9.040$… we have already recover the "big" loss of January.

 

So this is how you can play a good money management in order to not incur on unsustainable drawdown. Off course you do have to follow these rules.

 

You can leverage more the account, it depends how much you decide to put in your Park and trading account. In our example we have delevarage the investment by 10, if we want deleverage by just 5 we have to put 8.000$ in the park account and 2.000 in the trade account, so everything is doubled by 2. -7.4% become a -14,8% and same thing for profit.

 

THIS POST IS NOT TO PROMOTE THIS EA. I JUST TAKE IT BECAUSE IS VERY VOLATILE

AND I LIKE CONSIDER ONLY  REAL ACCOUNTS AND REAL STATISTICS

 

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