Drawdown with Leveraged ETF's

I am a little surprised by comments about a popular system here that trades leveraged ETF’s. The system was performing quite well and then encountered an 11.7% drawdown. That DD is well within what should be expected for a system trading leveraged ETF’s. In my opinion, nothing out of the ordinary happened. Anyone who prefers a lower DD shouldn’t trade leveraged ETF’s. Heck they shouldn’t trade equities for that matter.

Most such systems can’t beat the index over many years. This system will eventually be another one who can’t beat the index. It’s just a waste of money and time.

The S&P 500 has achieved a CAGR of just over 21% for the past five years. For the past seven and ten years the CAGR has been between 4% and 5%. Many people seem to not consider long term performance records. Beating the S&P 500 for the past five years has been achieved by very few. However, nobody expects the S&P 500 to perform for the next five years as well as it did over the past five years.

If that’s the case then you as well cant compare the performance of young systems with just a few years history with the 10 years performance of the S&P …

One of the best systems for the past five years would have been to buy and hold SPY using leverage. We all know what will eventually happen to that system but if you were to compare the results of that “system” over the past five years to the SPY you would erroneously conclude that it is a wonderful system.

Any experienced system designer would immediately notice that the system I just described has only one trade over five years and you can’t perform a statistical analysis on a sample size of one.

When reviewing trading systems, the sample size (i.e. number of closed trades) plays an important role in making statistically significant observations.

Also, when reviewing the merits of any trading system, it would be helpful to see how it performs in various market conditions.

Back to my original post, I just ran a Monte Carlo analysis on the closed trades for the system in question and, as suspected, the drawdown that recently occurred was within the expected range.

Hey Penney, it’s irrelevant whether or not the SP500 performs as well in the next five years as it has for the past five. A system such as the one you mention will still likely underperform. It will attempt to go long when the market is going down hoping for a bounce at the wrong time. It will get shredded and whipsawed during certain side way markets.

Trying to time long and short trades on the SP500 for years on end is a daunting task. I don’t think this specific system will do very well in the long term. That’s my viewpoint but we all have to make up our own minds of course.

Honestly. Who cares about the comments. If you like it, then subscribe to it.

I would agree with your comments regarding system performance and drawdowns. As a rough rule from my experience developing systems, the more leverage used the higher the drawdowns as a percentage of profits.