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Ken,
I think DD(E) as opposed to DD(Max) does have some value to it as
long as it measures beyond a single trade or what would be referred
to as max trade drawdown. By that I mean if you have three 5% losses
in a row then DD(E) is more than 5% it is the product of those losses
i.e. 1 - .95^3 or roughly 14.25%. There would only be a difference
between DD(E) and DD(Max) in this situation for example if during the
first trade you at some point had a gain but still closed the trade
at a loss.
As far as stop losses go they are nice but they don't obviate the
need for statistics like this as again multiple consecutive losses
will have an effect over and above the stop loss and losses on any
given trade can certainly exceed the stop loss.
Personally I want to see DD(Max) as opposed to DD(E) as I tend to
think of paper profits as profits none the less. This is however a
personal preference.
Fred
--- In amibroker@xxxxxxxxxxxxxxx, "Ken Close" <closeks@xxxx> wrote:
> All: I have gotten into a private discussion with someone and I
wanted
> to see your reaction to the concept of DD from entry. We always
cite
> the MaxDD statistic as being the worse pain we might experience in
an
> open trade in the future.
>
> It has also been mentioned that entries are not as significant as
exits.
>
> If you believe a system is EXCELLENT in choosing entries, then the
> postulate is that drawdown from starting trade equity is a useful,
even
> necessary, statistic to gather to monitor the ongoing success of a
> system.
>
> Note that I am not talking about drawdown from absolute starting
account
> equity, but drawdown of the trade equity committed to the trade.
If the
> system catches trends (agree that these have been less consistent
> recently), then the DD from starting trade equity is and will be
quite
> low, or at least it should be if the system delivers such
performance.
>
> Further, this parameter assumes a differentiation in psychology: to
wit:
> equity drawdowns from levels that represent positive returns are
less
> impactful on psyche that "going underwater", ie, having absolute
> drawdowns from entry (out of pocket paper losses). If I gain 25%
on a
> position and it retraces 50%, then I have a Maxdd on the trade of
50%,
> but I am still ahead 12.5% in terms of my entry. Doesn't this
affect me
> differently than having a 10% drawdown right from the beginning of
the
> trade? Sure it does.
>
> I would appreciate some comments on this way of looking at a system
> characterization.
>
> Thanks,
>
> Ken
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