How do we handle a drawdown

“MEGA” is a portfolio of 35 strategies, all of them are based on the mean reversion principle. Contrary to what many may think, this is not a single strategy.

We manage risks using three parameters:

– Risk per trade

– Max signals per basic currency

– Max drawdown

We can change these parameters to either increase or reduce profitability and risks.

How do we manage the strategy during a drawdown?

Basic conditions:

• Risks 1.5 / 3 (1.5% – risk per trade, 3 – max signals per basic currency)

• We take the FXCM account as our basis benchmark. With other brokers, the drawdown could be lower or higher, as the strategy is sensitive to the broker’s trading conditions.

With this risk, the working drawdown should be within -6%. When entering a drawdown of -4-5%, we conduct a deep analysis of the situation and identify the reasons for the drawdown. These can be: market situation, market changes that need to be taken into account, slippages, deterioration of trading conditions, force majeure, etc. As each drawdown has unique properties, our task is to identify weak points and eliminate them.

A drawdown of -7.5% is the critical drawdown level at which we rebalance the portfolio: we consolidate strong points of the portfolio and eliminate weak ones. In this situation, our main task is to recover with minimal risk, making changes to the portfolio while giving preference to strategies that have been the most stable according to past performance history. At the same time, the total risk in the portfolio decreases. That is, with a drawdown, we always exit at a lower risk in order to prevent a deeper drawdown.

How we work every day:

PREPARATION FOR TRADING: ANALYSIS OF THE MARKET SITUATION

  1. NEWS

30 minutes before the start of trading, an analysis of the market situation is carried out, important news in the calendar is checked:

– if there is scheduled news for a currency pair, the strategy automatically pauses 3 hours before the news

– if we have an open position, 5 minutes before the news, we close it (positive or negative trade implies no difference)

  1. FUNDAMENTAL BACKGROUND:

we analyze whether there are any serious events in the countries of the big 7. In the event that there are or were within the last day, we stop trading.

  1. VOLATILITY SP500

if volatility is high 1 hour before trading, we cannot trade.

  1. VIX

we take into account the VIX readings i.e. there should be no significant rise or fall.

  1. MARKET

on each currency pair, the presence of momentum, volatility, spreads, and the current profitability of the currency pair are taken into account.

TRADE

In the trading process, the main work is done by the algorithm, but remains under the control of a person at all times. In case of a force majeure, we can stop trading within 5 seconds on ALL accounts by pressing the “red” button.

During the course of trading, we pass through several markets, when the United States closes, when the United States is not open, or when the entire market is closed on rollover–each has its own nuances. Rollover is the riskiest moment in the trading process. Since there is little liquidity, significant slippage can occur for stop orders, therefore we attempt to proceed through rollover with minimum volume of trades. We can close the position before the rollover if it is potentially risky.

At 00:05-00:30 CET am, most of the positions are closed. In general, if we see that the day is profitable and positions are in profit by 00:15-30 CET, we try to close everything in profit and leave the market.

From our point of view, this is one of the most effective approaches to dealing with drawdowns and risks in general.

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