Way of the turtle

94
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Way of the Turtle

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Equity Curve - Linear Scale with Drawdowns
Total Equity and Drawdowns
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
–80%
–60%
–40%
–20%
0%
Apr 1984
Jul 1984
Oct
1984
Jan 1985
Apr 1985
Jul 19
85
Oct
1985
Jan 1986
Apr 1986
Jul 19
86
Oct
19
86
Jan 1987
Apr 1987
Jul 19
87
Oct
19
87
Dec 1987
Figure 7-4
Large Drawdown Resulting from the October 1987 Price Shock
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95
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the greatest source of anxiety for new traders. They encounter a
drawdown and then begin to question their methods: “Did I do
something wrong in testing?” “Did the markets change in some
way that makes my methods invalid?” “Is this going to continue?” 
Ways to mitigate the risk of system death will be discussed in later
chapters. Unfortunately, however, since the markets are dynamic
and are composed of many other participants, it is a reality that mar-
kets change, and this can affect the results of systems and methods
that previously worked; sometimes those changes can be perma-
nent. One of the ways great traders distinguish themselves from
average traders is by their ability to adhere to methods that others
have tired of and discarded and be successful with them.
This consequence that certain market participants stop trading with
certain styles because they believe that those styles no longer work has
an interesting side effect for trend followers. Every few years trend-
following traders experience a period of losses, and inevitably some
expert will announce the end of trend following. This usually coin-
cides with a large withdrawal of money from trend-following funds.
As more and more money flees from trend-following strategies, those
strategies start to become profitable again, often spectacularly so. At
least three or four times since the Turtle program began someone has
made the claim that trend following has ceased to work. I always laugh
at this, knowing that profitable markets are most likely quite near.