Who's the Better Trader?
- Thread starter TooL
- Start date
Trader B can use up to 10X leverage to achieve the same drawdown risk as Trader A, therefore his potential return given the same drawdown risk and assuming that liquidity is the same when he is trading up to 10x leverage. He can return 250% annually given that the same material conditions apply in the future.
Also, its basic to remember that in order to recover from a 50% drawdown, one has to have 100% return in order to break even.
To break even on a 5% drawdown one has to increase 1.0526 times.
The calculation is as follows:
X / (1-i) = Factor to increase
X/ (1-.75) = X/.25 = 4X to recover form a 75% drawdown
X.(1-.05) = X/.95 = 1.0526X to recover from a 5% drawdown
Also, its basic to remember that in order to recover from a 50% drawdown, one has to have 100% return in order to break even.
To break even on a 5% drawdown one has to increase 1.0526 times.
The calculation is as follows:
X / (1-i) = Factor to increase
X/ (1-.75) = X/.25 = 4X to recover form a 75% drawdown
X.(1-.05) = X/.95 = 1.0526X to recover from a 5% drawdown
You know, I was driving and thinking about this response and it began to bother me subconciously as being incorrect. I realized in a flash that I was too quick to judge:
Trader A and B may actually be the same trader with the same edge!!!! But trader A is using a full kelly criterion for example, while trader B is using a fixed fractional version. That would make a whale of a difference in possible drawdowns, and at the same time account for the higher variability of the drawdown and return of Trader A.
I am satisfied with this answer: Trader A and Trader B could easily be the same trader trading the same edge on exactly the same instruments on exactly the same time frame, but with different risk parameters!!!
nitro
Trader A and B may actually be the same trader with the same edge!!!! But trader A is using a full kelly criterion for example, while trader B is using a fixed fractional version. That would make a whale of a difference in possible drawdowns, and at the same time account for the higher variability of the drawdown and return of Trader A.
I am satisfied with this answer: Trader A and Trader B could easily be the same trader trading the same edge on exactly the same instruments on exactly the same time frame, but with different risk parameters!!!
nitro
lol To bring back an old thread, this topic has been on my mind lately.
Since we don't know about their performance histories etc, for the sake of argument, let's assume that those #'s are their first year. So no history... who would you put your money with?
Knee-jerk reaction would be Trader B, of course. Having such a small drawdown while having great upside shows he has a respect for risk and has a solid risk/roi plan.
Some others have brought up the excellent point that Trader A must either be a gunslinger or a great trader to come out of a 50% drawdown to end positive 35%. While the fact that he even achieved 50% drawdown may show an initial lack of risk management?
Either way, I still would prefer B... as I think many people would if they were looking to put their money with a trader...
Since we don't know about their performance histories etc, for the sake of argument, let's assume that those #'s are their first year. So no history... who would you put your money with?
Knee-jerk reaction would be Trader B, of course. Having such a small drawdown while having great upside shows he has a respect for risk and has a solid risk/roi plan.
Some others have brought up the excellent point that Trader A must either be a gunslinger or a great trader to come out of a 50% drawdown to end positive 35%. While the fact that he even achieved 50% drawdown may show an initial lack of risk management?
Either way, I still would prefer B... as I think many people would if they were looking to put their money with a trader...
if you want to manage money you had better be trader b. if you have 50% drawdowns you will scare your clients and many will look elsewhere. even if you have a great year after a 50% drawdown your client will be thinking" i have a big win. i should put it where its safe".
I was thinking of Schindler when I was reading this thread! The one thing that I will say about Schindler is he definitely has some good traits if he can trade thru the drawdowns that he has encountered.
Thanks, Grob and Formika. I agree. Our current 8% standard deviation of monthly returns is a lot more comfortable than the 16% we targeted during 2004 when we had the 50% drawdown. I sleep better at night without hundreds and hundreds of contracts on and earlier this month I even took my first vacation since starting Schindler Trading.
We're up 22% for 2006 so far and with our lower volatility I can already start to feel good about this probably being a profitable year. A friend joked to me tonight saying I should just put our money in a 9-month CD for the rest of the year and come back in January.
Over the upcoming months you can follow Schindler Trading's performance <a href="http://www.schindlertrading.com/index.php?page=performance">here</a> and see if we make some more money and have a whopper of a year
or if we lose what we've already made and have a down year. 
By the way, here is what an equity curve with a 50% drawdown followed by a 126% runup looks like... Does anyone else know of any recoveries from such a large drawdown? Until I lived it, I wouldn't have thought it was possible.
<IMG SRC="http://www.schindlertrading.com/include/content/chart20.gif" border="0">
Aaron Schindler
Schindler Trading
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.