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Why tolerate high drawdowns? Use stop loss orders or mentally set a stop
and use it. Al, the pseudo system you describe sounds like one that is good
at providing entry points but poor at providing exit points. My feeling
would be to use stops and possibly use another system/indicator for exits.
Lionel
----- Original Message -----
From: Al Taglavore <altag@xxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Monday, August 30, 1999 6:35 PM
Subject: Re: Is drawdown meaningless?
> Glen, if you had a methodolgy that resulted in a 60 % win factor that
> produced $12,000 worth of net profits but had a draw down of $19,000 and
> you had a trading account of $20,000, would you want to trade this
> methodolgy and risk $19,000 (or most of your account) to make $12000?
>
> I interpret draw down as the 'risk' measure in "risk and reward". Also,
if
> your system tests in test data showed a 60% win factor, that is not
> indicative that the same percentage will apply to out of test data or the
> real world.
>
> I do think you have started a very interesting thread, and I look forward
> to reading other opinions of this question.
>
> Al Taglavore
> ----------
> > From: Glen Wallace <gcwallace@xxxxxxxx>
> > To: MetaStock listserver <metastock@xxxxxxxxxxxxx>
> > Subject: Is drawdown meaningless?
> > Date: Monday, August 30, 1999 5:14 PM
> >
> > I first came across this idea several months ago, but at first I did
not
> > fully understand. The fog is now lifting, and I want to toss this out,
> > first, to get other people's thoughts and reactions, and second, to
> collect
> > my own thoughts.
> >
> > Simply stated, drawdown is the largest equity dip caused by a sequence
of
> > losing trades, and many use it to assess whether a system is tradeable.
> >
> > Assuming there is no mathematical dependency between wins and losses
(ie.
> a
> > win does not beget a win, or a win does not beget a loss) in a system,
> the
> > fact that your system test just happened to find, say, five consecutive
> > losses is irrelevant. Consider a series of coin tosses. Even though
there
> is
> > a 50% probability of heads, a sequence of five consecutive tails is
> fairly
> > common, but shouldn't influence a person to not bet on heads. In fact,
a
> > sequence of 10 consecutive tails is quite possible, yet the probability
> of
> > heads on the next toss is still 50%. An analysis of this 10-sequence
> > drawdown might mislead an investor into believing the coin-toss trading
> > system is too risky. In contrast, let's say that the series of coin
> tosses
> > yielded no consecutive losses, thereby giving the investor the false
> > impression of a small risk. In either case, the calculated drawdown is
> > meaningless.
> >
> > If there is no dependency between wins and losses, can we expect past
> > drawdowns to repeat? Can we expect future drawdowns to be bound by past
> > extremes? No; there is no limit to the possible number of consecutive
> losing
> > trades. Drawdown is not meaningful, other than to give some false peace
> of
> > mind.
> >
> > Since there is no limit to the number of possible consecutive losses
and
> it
> > is uncontrollable, the better yardstick is the size of the largest
losing
> > trade. To an extent, this can be controlled. And with proper money
> > management techniques, you can structure your trade sizes so as to
> survive
> > the inevitable string of losses.
> >
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