Defensive Trading: Trend Filters, Defensive Assets, and Drawdown Protection

Defensive trading is not about avoiding all risk. It is about surviving the worst periods so your capital can compound over the long run. A strategy that loses half its value needs to double just to recover, which is why drawdown protection matters.

Trend Filters

The simplest defensive rule is to exit risk assets when the market falls below a long-term moving average, such as the 200-day SMA. This rule is blunt and produces whipsaws in choppy markets, but it can dramatically reduce losses during sustained bear markets.

Defensive Assets

When equities fall, assets like long-term Treasury bonds, gold, and utilities often act as ballast. Rotating into these assets during market stress can smooth the equity curve. Be careful: correlations can change, and bonds can fall alongside stocks during inflation shocks.

Drawdown Protection

Drawdown protection combines trend filters, defensive assets, and position sizing. The goal is to cap losses so that the strategy can recover quickly. A shallower drawdown also improves the psychology of following the system through rough periods.

Test with NeuroBacktest

With NeuroBacktest, you can stress test defensive strategies against historical crises. Try: "Backtest a defensive rotation strategy between SPY and TLT using a 200-day moving average filter from 2007 to 2024." The engine shows drawdowns, correlations, and recovery times.