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Risk Profile Explained

Published on August 31, 2011, by in Trading Session.

What Does Draw-down Mean?
The peak-to-trough decline during a specific record period of an investment. A drawdown is usually quoted as the percentage between the peak and the trough(link). For example, you invest $1000 into stocks (Buy and Hold) and during a 1 year period your investment’s value ( equity) reached $650. This would reflect a 35% draw-down. Peak $1000 ( assuming your investment never reached a profit) – $650 = $350 , 350/1000 = 0.35.

Now that we have established what draw down is, we would like to build our Risk profile based off draw-down percentages. If an investment experienced a draw-down of 35% that particular system has a risk profile of 35. Trading systems are often categorized by risk which then reflects initially the period of draw-down one can experience during their investment.

Our peak to trough equity draw-down is fixed at 2% during each and every trading day eliminating periods of draw-down normally associated with investments. By design, our trading system has a risk profile of 2 which then can be reconfigured to achieve larger monthly gains. Our risk profile offers just enough room to trade comfortably while maintaining our previous capital gains. By establishing a solid foundation geared towards managing risk, we can increase or decrease our risk profile to ensure our monthly objective.

Our objective is to provide a stable trading system that continues to grow regardless of economical cycles and international turmoil while maintaining a tight risk profile. This creates a unique opportunity to increase/decrease our risk profile depending on current market conditions . If we increases our risk profile to 4 ( daily draw-down can experience a 4% loss) our monthly gain would be twice as great compared to our standard Risk Profile of two (2%).

2x the Risk = 2x the Gain.

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