More Winners or Larger Avg. Winner?

[inandlong]

Quote from Fluidity:



inandlong,

Is the above some sort of 'absolute' truth you are stating or just your opinion?

Perhaps to YOU DD's are irrelevant, but certainly not to ME...

Simply looking at the end result without taking into account the path it took to get there is no better than being blinded by the linear micro-level path it takes to get to the macro-level result...

I personally never look at just the return -- it is always DD/NET ratio...

"Assuming the two result in the same return, would more winners be superior because it result in a smoother equity curve?"
You make my point Fluidity without even realizing it. Drawdown is the question, and drawdown tolerance is the answer.

Successful turtletraders, as I understand it, endure large drawdowns and fewer trades, yet have significant returns. So is their method inferior to another that trades a bazillion times, has less drawdown, and returns the same? Perhaps to you it is if you cannot endure a large drawdown.

Put another way, say you are presented with two methods that require $100,000 each to trade. The first method takes 2-3 trades per day, has a max drawdown of $8000, and returns 30% annually. The second method trades about six times a year, has a max drawdown of $24,000, and returns 30% annually.

I would guess from reading your quote that you would choose the first method because of the smaller drawdown. Given that both methods return the same, I'll take the six trades per year and spend the rest of my time enjoying life.

So I stand behind my initial response that the answer is found in personal choice, ie., drawdown tolerance,, or suitability, and not a mathematical model.

 

[Mr Subliminal]

Quote from acrary:

If both strategies have the same expectancy, the same number of trades, and you're using a % of equity for your risk sizing method, then the higher win % is superior. It will have a lower DD, higher return and a better risk:reward ratio.

I do not wish to comment on the relative merits of the particular strategies or their drawdowns. I do, however, respectfully disagree with your statement that the higher win% strategy will have a higher return. Using the above assumptions viz. "the same expectancy, the same number of trades, and .. using a % of equity for your risk sizing method", the expected returns are equal for both strategies. In other words, after X trades there should be $Y in both accounts. This is both intuitive and borne out by my Monte Carlo simulations.

The higher profits are caused by more of the compounding opportunities taking place while making new highs instead of digging out from the DD.

Once again, there are no higher profits.

 

[man]

In and Long
put it the other way round. assume that with the draw down you learned to live with, you could make twice the profit - wouldn't that make the "timeOff" more lovely?


peace

 

[candletrader]

Given equal returns, I will take the lower drawdown strategy anyday!

 

[man]

Finally its not so much the draw downs but Sharpe ratio, that makes the race. And higher Sharpes tend to have lower draw downs as well.


peace

 

[MondoTrader]

"Drawdown" in relation to trading is just a euphemism for losing your ass. If you get used to losing large amounts of your account equity you won't have any account equity in the long run. Usually all it takes is completely blowing your first trading stake to learn this, but some people are more hard headed than others.

 

[inandlong]

Quote from man:

In and Long
put it the other way round. assume that with the draw down you learned to live with, you could make twice the profit - wouldn't that make the "timeOff" more lovely?
peace

Yes it would man, and you make a very good point as do many of your posts. In this case however, I refer again to the thread author's original post which states that the return for either method is the same.

If the original question were, "which is better for producing profits, a small or large drawdown?", your quote above would be right on the money. In essence you are saying to have more capital to trade with allows for the opportunity of greater returns... and makes for sweeter time off.

 

[inandlong]

Quote from MondoTrader:

"Drawdown" in relation to trading is just a euphemism for losing your ass. If you get used to losing large amounts of your account equity you won't have any account equity in the long run. Usually all it takes is completely blowing your first trading stake to learn this, but some people are more hard headed than others.

Don't forget the original question states that both methods have the same returns.

I don't know where the concept that drawdowns do not matter is coming from. My first reply, as all replies should be, is directed towards the original question. Given identical returns, drawdown doesn't matter, whether large or small, except for personal tolerance.

This is the problem with so many threads, the replies stray from the original topic. The original topic was not do drawdowns matter, or how important is drawdown, or how does drawdown affect future profitability.

 

[man]

You are right in answering to the original question ... and, yes, the more return the better and all the concept of risk/return just seeks to finally turn the table with the reading "leverage" a bit more to the right ...


peace

 

[AAAintheBeltway]

I think some key concepts are being overlooked. First, everyone is concerned with drawdown, but we don't even know what the drawdown of these systems is. Everyone is just assuming the system with larger winners has to have a larger drawdown. Seems intuitive, but it doesn't have to be that way. Drawdown is usually a function of the distribution of losers, not purely their size or frequency.

Second, drawdown is measured from the highest equity peak. Is it unreasonable to think the system with larger winners might achieve a higher peak equity? Personally I could live with more drawdown if it came off a bigger number.

Most important, I think you have to try to determine which system would most likely duplicate its results in real time. A system with small winners may be overly sensitive to slippage or optimization. A high win percentage achieved with very small average wins tends not to be robust. On the other hand, a system with a few large wins is highly dependent on your actually taking those trades. If you tend to override the system or if you had to go to the dentist or airport that day, you would have been better off with the other system.