Message From TraderJanie
If you’ve read my blogs, you’ve probably assimilated more information on using a circuit breaker (CB) than your poor brain thought possible. Yet, today, I’m going to take that education even further and reveal the nitty gritty details of how QiT uses its Circuit Breaker (CB). If you’ve just groaned or if your shoulders just slumped to their chest, please straighten up those blades and forage ahead. I can assure you it’s all worthwhile and all very relevant. As well, just as a teaser I’m going to pose an alternative to you where you’ll have to make a decision. It won’t be an easy one, of this I am sure.
To recap, a circuit breaker is a method QiT uses to monitor system health. So far so good, are you all still with me? Once we enter a drawdown that necessitates a move to cash, we have to do it in the most expeditious way conceivable.
Turns out that is to let the system exit the trades we are currently holding according to the rules of the system. We don’t take any new trades, going to cash, and waiting for the portfolio to get back above its circuit breaker.
If you look at any of the equity curves for the Quantitrader portfolios, you will see that each time the portfolio dipped under its circuit breaker, it quickly rebounded.
This is where I get antsy. I gaze at all the preceding draw downs, at how every solitary dip spiked down, then rebounded just like a kid bouncing off a trampoline. Sometimes the spring off the trampoline is in slow-mo and it takes few weeks to clamor back above the CB but for most episodes the ricochet it is very swift. Drop, hit the trampoline and bounce right back to where it was.
This is why I’m so reticent to ship the portfolios off to the sidelines. However, we still have to remain diligent to the fact that the circuit breaker is a monitor of system health. We have hark back to the idea the circuit breaker is an auditor of that health and ensure that the system has regained its footing before we maneuver back into trading.
Even though our observations have revealed that every solitary instance, when a draw down required a liquidation, we see the same phenomena, we have to be continuously cognizant of the point, this could be the one time when it doesn’t rebound and just continues downward, thus we relegate ourselves to the sidelines.
The Other Side
To be fair, I need to tell you that adhering to this regime is not easy. You have to have a lot of faith and confidence in, not only the system, but yourself. If you start trading through the draw downs, as opposed to stepping aside, you will have to know you will be able to endure the emotional turmoil that, I assure you, you will encounter.
If you’ve been trading with Quantitrader for any length of time you’ll probably have that confidence but then you have to ask yourself if the area between your ears can take the turmoil this decision will invoke.
Now you have to make a decision to trade through them or not.
Plan your Trade and Trade your Plan