Why Some People Lose When Trading Systems
by George Pruitt and John Hill
The managed futures industry manages about 28 billion dollars. Most of these funds are managed successfully by a systematic approach. If money is being made with systems, then why do a lot of small traders fail when applying a systematic approach to their trading? It is appropriate to examine the numerous reasons why people fail with systems.
One major reason for failure is a lack of sufficient capital allocated to the system. Traders will allocate only $20,000 to a system that has a historical drawdown of $20,000. A more appropriate equity allocation would be a three to one equity to drawdown ratio. A lot of times after a trader has had significant profits, he will forget any money management schemes and double up. The inevitable drawdown then occurs and washes him out. He then goes looking for yet another system, believing that his existing one has proven itself to be “no good”. All systems have drawdowns and one must understand this concept and be prepared for it. In a lot of cases, system traders stop trading right be-fore the system turns around. If a system trader understands the behavior and history of a system and prepares his capital allocation accordingly, he will definitely have a higher probability of success.
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