acceptable Drawdown

[suedeuno]

curious to know what system builders strive for in drawdowns? I have created a system that has a high winning rate, and good average profit over a different periods of time. But the drawdown % is between 5 and 10. I realize this is subjective as well to my funds but I was curious to what others are using.

I should note these figures are not in real money but backtesting only. I don't have the time to trade it so I would have to automate it to go live.

 

[Vorpal]

The drawdown statistics really need to be analyzed alongside your return and volatility numbers in order to be meaningful. For example, an annualized return of 30% with a 10% max drawdown is certainly a better system than a 10% annualized return with a 10% max drawdown.

The other thing is that your max drawdown point only represents one single day out of your whole simulation. There are other ratios that look at "average drawdown" or "drawdown length" that are also beneficial and incorporate more data points. A max drawdown of 10% with an average drawdown of 5% tells a different story than if your average drawdown is 1%

As far as I am concerned, anything with an annualized return component >= max drawdown is pretty good and more than 2x-3x is either very good and/or curve fit and/or your "max drawdown" is yet to occur.

Once you find a favorable combination of return vs. volatility vs. drawdown, the rest is a personal decision. You can always lever-up or lever-down your system to get to your target level of return/drawdown. If your current model has 5-10% max drawdown and you feel you can stomach more, then double your leverage. What lets you sleep at night? For some people it is 10%, for others it may be 50% or more.

 

[Mathemagician]

'Acceptable drawdowns' are like 'minor surgery', which is of course any surgery performed on someone else.

M

 

[Thunderdog]

Quote from Mathemagician:

'Acceptable drawdowns' are like 'minor surgery', which is of course any surgery performed on someone else.

M

Exactly. I find the most acceptable drawdowns to be someone else's.

 

[suedeuno]

Thanks. With my program I'm only given max figures.

Max trade %: -4.46%
Max system %: -8.10%
Recovery: 3.01
Profit factor: 2.11
Payoff ratio: .88
RR Ratio: 5.21
Sharpe: 1.94

Winning %: 70.59
Avg. profit %: 2.34
Avg. loss %: -2.47

These are optimized figures.

Quote from Vorpal:

The drawdown statistics really need to be analyzed alongside your return and volatility numbers in order to be meaningful. For example, an annualized return of 30% with a 10% max drawdown is certainly a better system than a 10% annualized return with a 10% max drawdown.

The other thing is that your max drawdown point only represents one single day out of your whole simulation. There are other ratios that look at "average drawdown" or "drawdown length" that are also beneficial and incorporate more data points. A max drawdown of 10% with an average drawdown of 5% tells a different story than if your average drawdown is 1%

As far as I am concerned, anything with an annualized return component >= max drawdown is pretty good and more than 2x-3x is either very good and/or curve fit and/or your "max drawdown" is yet to occur.

Once you find a favorable combination of return vs. volatility vs. drawdown, the rest is a personal decision. You can always lever-up or lever-down your system to get to your target level of return/drawdown. If your current model has 5-10% max drawdown and you feel you can stomach more, then double your leverage. What lets you sleep at night? For some people it is 10%, for others it may be 50% or more.

 

[Bo_D_]

5-10% drawdown?


boy would i be happy with that.

very little if you ask me.

 

[smilingsynic]

The longer you trade, the smaller the drawdown you tend to see as "acceptable", because you have put so much blood, sweat, and tears into the trading over the years that you value every dime you have made.

5-10% when I first started would have been nothing, but now, anything more than 2% demands that I reaccess what I am doing (I'm an intraday trader), because I must be doing something wrong.

 

[vikana]

The summary stats you give on the system look acceptable, but you need to know how the max drawdown is calculated to see if it's something that's tradable.

E.g. if the simulation assumes 100k account and trades 100 SPY, then and 8% DD is huge. If the position sizing assumes full utilization of the 100k (no leverage), then the DD number is good.


You also need to know how long the DD lasts, and how frequently it occurs. If your software doesn't provide that information, you need better software.