Lately, I have been “feeling” the ups and downs of the equity curve more than usual, mainly because I’m updating the results on this site so frequently.  For example, I was up almost 70% for the month of March after my first trade last week, but two losing trades have knocked me down to a 40% gain for the month.  Objectively speaking, I am thrilled to be sitting on a profit of this size.  If I place no more trades this month, March will have been my most profitable month to date.

One of the many benefits of running an automated trading system is being able to see the historical peaks and valleys in the system’s equity curve.  With the Cable Glider “cranked up” to its current high degree of leverage, it can and does experience drawdowns in excess of 20% with regularity, and occasionally suffers drawdowns even higher than that.  The current version and leverage level of the Cable Glider shows a maximum historical drawdown of 42%.  That occurred in May 2006 after the system experienced a 400% gain in April 2006.   This means that the system had more than doubled its equity over the two month period, but had done so in a wildly volatile way.  I was not trading the system live at that time, but I was trading live in February and March of 2007, where the system saw a similar drawdown (39%) after a relatively smaller run up. 

It might be easy to think that such drawdowns “do not hurt” because they are typically occurring after gains in the equity curve.  Well, with 5 months of real experience with this system under my belt, I can say that drawdowns are most certainly painful even if they occur after big gains, BUT ONLY if I have mentally anchored myself to the new equity level.  It’s a simple matter of mental framing;  if I focus on the 40% gain, I am happy.  If I focus on the 14% loss since the last equity peak, I am unhappy…

 So when is it appropriate to mentally reset my “even money clock”?  Well, as far as I can see, there are only 2 timeframes that SHOULD matter to me, but in reality there are 3 timeframes that DO matter to me.  The timeframes are weekly, monthly, and yearly.  I believe that it is appropriate to measure the results of the system on a monthly basis because there are lots of market moving pieces of data that come out on a monthly basis.  I believe that yearly results measurement is also appropriate, because we need to pay taxes on our gains once yearly.  Weekly measurement really doesn’t serve any purpose, but since I am always out of the market on weekends, I end up having a lot of time to think about the last week’s results.

As with many other issues on the “mental” side of trading, simply recognizing the problem goes a long way toward eliminating it…as long as I am “up” over some time frame, whether monthly, yearly, or even all-time, I can improve my trading psychology by reminding myself of the gains…this mentally anchors me to my starting equity point, and not my current equity point.  However, if I were showing losses in all time periods, the only reasonable way to stay psychologically strong is by placing smaller trades, and looking for ways to improve my trading to get it to profitability.