Way of the turtle

Risky Business
Because there are many different types of risk, there are many dif-
ferent ways of measuring it. There are big risks that may come
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Way of the Turtle

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from relatively infrequent occurrences, those which happen once
or twice a decade; there are more common risks that one might
expect to occur a few times each year. Most traders worry about
four primary risks:
• Drawdowns: Strings of losses that reduce the capital in their
trading accounts
• Low returns: Periods of small gains in which one does not
make enough money to live on
• Price shocks: Sudden movements in one or more markets
that result in a large unrecoverable loss
• System death: A change in market dynamics that causes a
previously profitable system to start losing money
Let’s examine each of these risks and then consider assessments
that can be incorporated into risk/reward measures for evaluating
traders and trading systems.
Drawdowns
The drawdown is probably the risk that causes the most traders to
stop trading and results in the most traders ending up as net losers.
The equity curve shown in Figure 7-1 represents the results of trad-
ing with an account of $100,000 from January 1996 until May 2006
using the Donchian Trend system.
From the graph, you can see that the equity has grown at an aver-
age compounded rate of 43.7 percent over the slightly more than
10 years of the test. There was also a period during the test that
exhibited a 38 percent drawdown.
By What Measure?
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Equity Curve - Log Scale
$100,000
Jan
20
06
Total Equity
Jul 2005
Jan 2005
Jul
200
4
Jan
20
04
Jul
20
03
Jan 2003
Jul 2002
Jan 2002
Jul 2001
Jan 2001
Jul 200
0
Jan
20
00
Jul
1999
Jan
19
99
Jul 19
98
Jan
1998
Jul 1997
Jan
19
97
Jul 1996
$200,000
$500,000
$1,000,000
$2,000,000
$5,000.000