You do not know if it will strike tomorrow but you do know that it is a rare event. Think of it like going ‘all in’ on the first hand of a poker match. You stand a very good chance of everyone else folding because the risk to reward is too high for them but just once in a while one of them will be dealt a royal flush in the first hand of a game and you’ll go bust.

I have several strategies that don’t show massive draw downs in back testing but you never know what the future will be so just because a filter has kept you out of the market in the whole of the historical past it does not mean that it will stop you buying at the top just before a disaster event in the future. Nothing is certain in this game.

My thoughts are that the longer you are in a game the more chance that you will be in it when a disaster event occurs so try to make money fast and reduce your risk as time goes by.

As for a disaster stop loss – why use one if you have a large capital and a small stake? With a large stake you can ride out a big drawdown – you just have to be mentally able to start with a small capital and a large stake and be willing to lose the small capital if an event happens too soon.

From all my back-testing I have seen quite often that when you switch reinvestment on you start with a lot of winning trades with small stakes and then just as you have a reasonable amount of capital and a larger stake an event happens and you wipe out a lot of your large capital. So why not do it the other way round – start small – bet big and reduce stakes as capital goes up?