Nobody likes to lose… least of all us. Don’t get us wrong- we know that drawdowns are a part of the game when investing in a trading system, but that doesn’t mean we have to be content to stare those losses in the eye. As such, we’re constantly looking for ways to minimize losses and improve the trading systems we’re running for clients.

When it comes to a losing streak and new max drawdowns in trading systems, we have long said that trading systems don’t break; they just become more risky. A trading system doesn’t go “rogue” a la the prop desk at UBS, firing off trades it wasn’t designed to process. No, the cause of trading system losses is much more nuanced than that. Trading system losses are the result of the system entering an environment which isn’t kind to the pre-programmed logic of its inner workings.

With the popular Strategic ES and SP programs having hit new maximum drawdowns following a very tough October, we went to work last week seeing just what sort of environment was the culprit for the recent losses on the Strategic system (yes, there is still work going on in the industry not related to the MF Global scandal). Our answer? That the higher volatility we would expect to be good for the system in fact cuts both ways, resulting in the larger winning trades investors are after, but also resulting in larger losing trades. So, naturally, the next step was to look for a way to bypass the too hot and too cold climates and filter our way to a volatility temperature that would be “just right.”

How did we do? You’ll have to click through to find out…