Way of the turtle

93
ED: Eurodollar - December 1987 Contract
90.0
Nov 1987
Oct
1987
Sep 1987
Aug 1987
Jul 1987
90.5
91.0
91.5
92.0
92.5
93.0
93.5
Figure 7-3
Effect of Price Shock on Eurodollar Price
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It was amusing in an ironic sense that the day of the crash I made
money. It was the government freaking out and lowering interest rates
overnight with no warning that killed me. Now that was a price shock.
Figure 7-4 is a graph that shows an initial trading account of
$100,000 using the Donchian Trend system from the time we
started trading as Turtles in 1984 until the end of 1987.
You can clearly see the large spike representing a 65 percent
drawdown. It is important to remember that that drawdown
occurred overnight. There was no chance to exit the market. It is
also interesting to note that the drawdown from that single day was
twice anything the system would have indicated through historical
testing. In other words, the historical testing would have under-
stated the drawdown by a factor of 2.
All traders who wish to stay in business would be prudent to keep
the reality of price shocks in mind as they settle on an appropriate
risk level for their accounts. Anyone who wants to earn high returns
runs an equally high risk of experiencing a high drawdown or even
a total loss of her entire trading equity if a large price shock occurs.
System Death
System death is the risk that a system that has been working or that
appears to have worked on the basis of historical testing suddenly
stops functioning and starts losing money. This risk comes more
from relying on poor testing methods than from the markets them-
selves. It is also a larger risk for those who trade short-term systems
that have been optimized for recent price action.
For a new trader it may be quite difficult to distinguish between
a system that is merely in a drawdown period and one that gen-
uinely has stopped working. I would venture that this is probably