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Dow Theory Special Issue: Visualising Drawdowns

|Includes: SPDR Dow Jones Industrial Average ETF (DIA), IYT

Buy and hold versus Schannep's Dow Theory

An image is worth than thousand words. I have profusely written on this blog about the excellent job Schannep's Dow Theory does at containing losses.

Well, today I won't give stats. Just two charts (created by courtesy of TradeStation ®) which are self-revealing.

The first chart is the Dow Industrials from 1/02/1953 to 09/20/2013. It epitomizes the "buy and hold" philosophy. As you can see the drawdowns are hair curling. Would you have survived (both financially and mentally) such drawdowns in real life?

 

 

SPY: Buy and hold. Drawdowns destroy the real investor

The second chart is Schannep's Dow Theory during the same time period. You don't need to be a market guru to realize that risk (draw downs) are contained.

 

 

SPY: Schannep's Dow Theory. Drawdowns contained

I will just give you two pieces of data to highlight the net solidity and outperformance of Schannep's Dow Theory:

a) Largest loss: -10.45% .

b) Deepest drawdown (caused by largest string of 3 consecutive losing trades): -19%

Now it is up to you dear readers to draw your conclusions.

Have a nice weekend

Sincerely,

The Dow Theorist