In the last few months, I’ve soliloquized enough about circuit breakers and Max Drawdowns that you would probably run from the room screaming, hands flailing above your head, if I mention them again. BUT… there is another QiT metric I’ve not broached as of yet, so, this week, I will make another attempt to bore you silly and discuss one more metric we should all understand. Its the Maximum Drawdown Duration. And, of course, we are going to dig in, in our usual geeky way so you will never have to ask another question about MDDuration.
Maximum Drawdown Duration
MDDuration is an extension of the Maximum Drawdown but this metric does not examine a drawdown from a perspective of dollars or percentages, rather from the belvedere of time, conveyed in days, weeks, months, or in some cases, years.
To recap, a Max Drawdown is measured from the day a retracement commences to the day a new peak is grasped. Once the new high is touched, the percentage change from the old high to the bottom of the largest trough is recorded. Thus, the Max Drawdown Duration is the time of the Max Drawdown.
For example, in this chart of the SPY the ETF started a retracement in Oct 2007 and did not reach a new high until April 2013. In other words, the SPY Max Drawdown Duration, if using a backtest timeframe from January 1, 2007 to today, would have calculated to 67 months or 5 years and 7 months. You don’t want to discount this metric because during any financial disaster, such as what we were subjected to in 2008, you would not be able to withdraw even a modest amount to maintain relatively common expenses such as purchasing that very much needed car to get yourself to work each morning. Let alone supporting a child who is faced with the horrendous cost of college. If you’re depending on an account for income then you’ll have to dip into the principle and, of course, the consequence of that move is a lower balance to build upon once the account finds the bottom and begins the long laborious climb to the next equity high.
Bottom line, it is essential we genuinely comprehend how you will handle an extended period between two equity peaks and how you will negotiate the days while clamoring back to the next peak.
QiT posts the MDDuration on each of the Portfolio’s Performance Pages but to save you going through them all, I have consolidated each period for the portfolios.
Why QiT is QUiTE Unique
I’ve endeavored, in the last few newsletters, to chronicle some of the features that makes QiT distinctive, unique and superior to comparable services. One integrant, of which we are most proud, is 2-tier position sizing.
In previous newsletters, I’ve voiced what it takes to be a successful and consistent trader but let me summarize it here:
- Only the most successful and consistent traders have a well thought out strategy with exceptional entry criteria so they do not succumb to the spell of the siren (the enter button on their trading platform) that sings with a most beautiful, enchanting voice, luring sailors (traders) to crash their ships (accounts) and die (lose all their money).
- Only the most successful and consistent traders exit stage left (or right) when the director (the system rules) instructs them to leave – even though every fiber of their body is pulling at them to stay on stage and keep singing (stay in a trade).
- Only the most successful and consistent traders employ a money-management regimen that will apportion a predetermined percentage of available funds to any one trade.
QiT’s 2-tier position sizing takes the 3rd fundamental and quantifies this allocation of funds.
The most rudimentary way to do this is designate an absolute percentage to each trade – for example, 4 positions, 25% per position. But we asked the question what if there was a systematic technique, using position sizing, that would ramp up returns yet not escalate the risk? The retort was yes there is and it is 2-tier position sizing.
Here’s how it works. Using QiT’s professional technical analysis software, we, first of all, determine the optimum number of total positions for a specific portfolio. The next step is to calculate the optimum number of large positions, Once that has been calculated the software assigns a percentage to each of the large positions, called the large position factor. When the # of total positions, # of large positions and the large position factor has been calculated, and optimized, it’s easy enough to do the math and compute the number of shares to trade. Fortunately though, QiT does all the computations for you, and just tells you the number of shares to trade based on your account size.
Like most of what QiT does, it’s simple, its elegant and it works.
Plan Your Trade and Trade your Plan