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Game Theory Insights with your Trading Account Drawdown

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One of the “games” in Game Theory is the cooperative one which is very different to the competitive game of trading where you eat what you kill.

In cooperative games we agree to drive on one side of the road, it is irrelevant which side we choose, as long as we agree on a side. Agreeing on a side draws on something in Game Theory some call common knowledge and academics call the focal point.

Insights from a Nobel Prize winner

Thomas Schelling Nobel Prize winner in this field provides an interesting insight. He says if 2 people agree to meet at 1pm in New York City tomorrow. They then realise on the way to the meeting that they forgot to arrange a location. Unfortunately they cannot contact each other. What will be the likely scenario?

Schelling says almost everyone would meet at Grand Central Station under the Big Clock. Why, because everyone knows that everyone knows that is where you meet when you are lost.

What the hell does that have to do with my trading account drawdown?

There is a very similar cooperative relationship with drawdown and performance which satisfies common knowledge or a focal point.

In our study we plot an accounts maximum drawdown (even if this point is reached for a second) and the accounts ultimate performance. What you see is a beautiful common knowledge trend that is unmistakable. We witness the inevitable cooperative relationship of Max Drawdown weighing down Performance.

The PsyQuation alert system calculates each traders drawdown focal point and does all it can to prevent its traders reaching this point. Understanding risk and your emotionally charged actions is a major step towards more profitable trading.

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