Why Orderbook does not believe in taking big risks for huge returns
When it comes to risks management in Orderbook’s trading strategies, there is one golden rule that we follow: Learn how to lose first before learning how to win.
One of the most powerful ways to ensure profitability is to minimize drawdowns in capital.
Warren Buffet is quoted as saying “Rule number 1 of investing is never lose money. Rule number 2 is never forget rule number 1”. The hidden message in these seemingly obvious statements is that building wealth depends much more on preventing large losses than it does on achieving large gains.
It is not uncommon to hear of some trading programs that are able to deliver very high returns for a few months when the market favours them. However, when a drawdown hits, they are often unable to recover from the deep losses for very long periods of time because the leveraged risks they take are too big. That is why some of these trading programs do not survive for long.
Orderbook’s trading strategies are designed to achieve stability and profitability in the long term.
What is a drawdown?
A drawdown is when your trading or investment account goes lower from its all times high in capital. Your account is either making new all time highs or in a drawdown. No trader or investor continually makes all time highs, everyone spends some time in a drawdown. It is much easier to make money when you don’t have to spend a lot of time gaining back what you lost. The math of drawdowns works against you as it takes more returns to get back to even than you lost on the way down.
Do you know how many % gain is needed to recover from a drawdown loss?
A 10% drawdown requires an 11% return to recoup the loss. It requires a larger percent return to recover a loss than the percent loss it took to lose it.
A 20% drawdown will require 25% return to recoup the loss. If you lose 50% of your money you need a 100% return on your money just to get back to even. A $100,000 account that drops 50% to $50,000 needs a 100% return on the $50,000 left just to get back to $100,000.
Below is the math on getting back to even after a drawdown in account capital.
As you can see from the table above, the optimal drawdown % would be somewhere between -15% to -20% where it is much easier to recover losses.
This is the reason why Orderbook does not believe in taking big risks for huge returns because even the best trading program in the world will experience periods of drawdowns. If we allow losses to exceed -25% to -30% during these drawdowns, it becomes much harder, and more time is needed to recover back to break-even level.
What are the expected returns for Orderbook’s trading strategies over the long term?
A potential average yearly return of 40%-60% with expected drawdown between around -20% will be considered ideal by most standards.
*Long-term = 3 to 5 years or longer
What are Orderbook’s business objectives?
- Ensure customers will not suffer huge unrecoverable losses from copy trading.
- Ensure our trading strategies can recover from losses faster.
- Ensure stability and probability of profitability in the long term for our trading strategies.
It has never been Orderbook’s desire to develop get-rich- quick trading strategies. Our business model is designed to achieve stability and profitability in the long term. We know that it only takes a few bad trading months to destroy any goodwill if we are not careful about drawdowns.
We hope this article shed some insights about how Orderbook viewed risks and returns. Thank you and happy trading!