The system developer carefully reseached recent blowups and find that overleverage is the main cause of blowups.
In order to reduce drawdown and eliminate any blowup possibility,Index Futures will always use moderate leverage and never be overleveraged.The system developer believe Index Futures has enough edge to make decent return under moderate leverage.
The focus is, low drawdown, low drawdown and low drawdown.
Posted by: Wang Wei ( C2 Score: 323)
When: 6/18/11 (12:42)
I would say, the direct cause of blowup is overlevervage.
When a system is overlevervaged on a trade,it is more likely to fail to execute stops, because the the loss is too big under the overleverage.The recent blowups were all due to a single trade that failed to trigger stop and let the loss run bigger and bigger.
There were circumstances that in the past certain market patterns dispalyed very high probability, so some systems choose to put big bet on these patterns, when the pattern failed and the big bet run into big loss, system choose to continue trusting that pattern instead of executing stop loss, it is partially because the loss is too big.I believe if that trade was not overleveraged, a stop loss is more likely to be executed.
Why some systems intend to be overleveraged?Because they want to raise performance.Their edge is not high enough to get the performance they hope, so they seek overleverage.
If a system does not have enough edge, whether overleverage or not doesn't change its fate.
If a system does have enough edge, eliminating overleverage would help this system in the long run, although in the short run performance would not look so brilliant.
On the other hand, if you want to avoid a system that may blowup in the future, check if its trades were overleveraged.