Drawdown which went for 273 calendar days

In this blog post I am going to talk about the reasons behind the long drawdown which went for around 9 months for me and how I overcame it. Also few learnings based on it. 

THE RISE

My second innings in trading started in July 2020. This was the time when Covid had caused lot of people to work from home and lose jobs also. At this point I thought if I can make 20% per year on my savings then I can become financially independent. To do so I looked into trying my hand again in Stock Market. I started with stock tips from IIFL and picked an analyst who used to provide calls for IIFL and traded all of his calls in equal proportion. I was overall in profit of 5 to 10% but effort to track the calls and trade as and when they are provided was too much and was not sustainable in long term along with a job. 

So then I thought to try out Intraday Future & Option paid tips. Had already destroyed around 11 lakhs in paid tips in my first innings of trading but still went with it in Oct/Nov 2020 timeframe. The calls provided were only 20% right and I lost around 3 lakhs because of that. Stopped following the calls then and there. 

After that I observed markets and they were always going up and up. Started selling OTM monthly PUT options which were out of money by 10% of Spot price without any Stop-loss and it started giving continuous profit from Jan 2021 onwards. However the profit was less and there was a danger of losing all the money as I hadn't come up with an optimal SL for these trades. In May 2021 attended a trading workshop on systematic trading and got to know about back testing tool Stock Mock and algo platform Tradetron. Also learnt about Bank Nifty positional trades (similar to https://arunstrategy.blogspot.com/2022/05/bank-nifty-weekly-strategy.html) and started trading them.

July 2021 was a key month in terms of me knowing about Nifty straddle strategy and result day based straddles. There are lot of result based videos out on Youtube from SMB capital and got influenced by it to try out the result based strategies. 

In July/Aug 2021 month result based short straddle gave breakeven performance but Nifty straddle did very good and helped in increasing the equity curve. 

Oct/Nov 21 were the months when result based strategies gave good profit and combined with good performance of Nifty Straddles it made those months the highest profit earning months for me. The return for Nov was 6.1 Lakh on capital of 40 Lakhs (15%). Also at this point I started a range breakout based Buy strategy which did good in Nov/Dec 2021 thereby making it peak of my equity curve. 

THE FALL

The market behavior changed from Jan 22 onwards. Nifty straddles which were giving good profit in 2021 started wavering in performance. Also result based strategies which helped in achieving good performance in Nov/Dec'21 gave heavy losses in Jan 22 and Feb 22. Though the range breakout based buying strategy was still working fine. This caused Jan'22 to be a negative month. Based on success of range breakout Buy strategy, I started range breakout based sell strategy at ITM7 level and it combined along with Nifty straddle gave me highest intraday profit on 15-Feb-22(2.78 lakh) of my trading journey. On that day (15-Feb-22) I was happy without knowing that I will not be able to achieve that kind of profit even in a whole month in months to come. The profit of 2.78 lakh was gone in next 2 days because of range breakout based strategy suffering heavy losses and then range breakout based sell strategy was stopped by Feb 2021 end. In March, tried one strategy from tradetron market place and one on my own but both of them gave losses thereby ending March 2021 slightly negative. 

Apr '22

At this point of time I was in 40% profit for the financial year so thought I can increase it by following same set of strategies if I use hedges to trade more lots. So I doubled the capital as well as took hedges to increase the number of lots which can be traded with that capital. Apr 2022 was not good for Nifty straddle and my losses increased by the end of the month. Main strategy as well as hedges both gave losses thereby increasing drawdown. This was also the month when I started BN Inverted strangle strategy on multiple time frames (bn-inverted-strangle-strangle). Also the experiment with taking hedges to reduce margin was over for time being. 

May '22

Sometimes when things are not going your way anything you try also doesn't work. As Nifty straddle and Bank Nifty straddles were not doing good, I increased the lot size to 20 on the monthly put sell strategy which had never ended in loss from the time I started executing it (i.e. from Jan 2021). This is the strategy which I am talking about -> Nifty monthly put sell But as nothing was going right during this time for me, the Nifty fell and fell during this month. The option reached at SL level of 100. But historically I had known that the max an option has gone beyond its entry price was by 278 points (after Mar '20) so I held on to it instead of taking a stop loss and took exit only when it went beyond by 300 point. Not respecting the position sizing as well as SL caused my drawdown to reach its peak of 8.64 Lakhs on 11-May-22 when I squared off those Nifty monthly puts at 300 point SL. Losses in financial year FY 22-23 reached around 5.18 lakh at this point of time. 

I had lost almost 30% of profit earned in previous financial year and thoughts were coming in mind to whether to continue with trading or take a break. 

THE LONG ROAD TO RECOVERY

May '22

After reaching the max drawdown at portfolio level, Nifty straddle and BN inverted strangle strategies did great and because of that May ended in a profit. Had position sizing and SL would have adhered to, this would have been the most profitable month in FY 22-23. Also started exploring various strategies in addition to existing ones and my blog Arun's option trading blog was born to write about them. 

Jun '22

With Nifty straddle & Bank Nifty inverted strangle working well in May, I thought that may be drawdown for Nifty straddle is over and continued the same set up in Jun also. Also included 3 more strategies in my basket - Bank Nifty 100 point strangle and Bank Nifty 20 point strangle and BN ATM + OTM2. BN ATM + OTM2 gave big loss in this month along with not so good performance from Nifty straddle and Bank Nifty inverted strangle thereby making the overall returns in the month negative. 

Jul'22

Moved some of the trading capital back to Fixed Deposits as the drawdown was still on and returns were not much. Reduced the position sizing on Nifty straddle and started including more and more expiry day based strategies in the portfolio. Also as strategies increased, the Zerodha's brokerage also increased. Started moving some of the capital to Finvasia to avoid brokerage charges. Though July month ended in profit, it could have been higher if not for execution issues from Tradetron which caused a loss of around 80k on a day in July. 

Aug'22, Sep '22

Strategies added from Jun'22 onwards worked as 100% non co-related strategies in these 2 months and overall profit was very less. 

One of the main reason for it was Bank Nifty inverted strangle strategy going into its maximum historical drawdown. It was stopped by Sep end. 

Oct'22, Nov'22

Strategies added into basket from May'22 onwards worked well in Oct & Nov and on fateful day of 17th Nov 22 the drawdown ended after 273 calendar days (around 9 months). 

What didn't work

• Successful strategy of last year - Nifty Straddle stopped working this year
• Allocating a big portion of the capital to strategy with high success rate having higher risk
•  Subscribing to few Tradetron strategies in its marketplace which were advertised having 10% monthly profit. However the strategies started giving losses from the time I subscribed to them
• Few strategies giving good profits in back test started giving losses from the time they were implemented in live market

What worked:

1. Removing/reducing position sizing on non-performing strategies
2. Diversifying into multiple strategies
3. Moving to expiry day heavy set up with less risky strategies having less co-relation b/w them
4. Optimizing on brokerage by moving some part of trading funds to Finvasia

How to decide on the drawdown when you should stop executing the strategy

There are various theories on how much draw down you should take before dis-continuing a strategy. Few say 2x and few go by Monte Carlo simulation.  In my case once a strategy goes beyond historical drawdown, I reduce my position sizing by half on it and then watch it for 1 month. If draw down keeps on increasing and goes beyond my selection criterion for a strategy then I dis-continue it. E.g. say my selection criterion for a 100 point strangle strategy is that it should not have drawdown beyond 10k per lot. If it is going beyond that point then that strategy will be discontinued whether it goes to 15k drawdown and then recovers after that.