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Guy:
This post was actually unrelated to our previous discussion. No insult
intended. The coin-flipping system is actually my own copyrighted stock
selection system. MetaStock code available for the low, low price of $3,000.
----- Original Message -----
From: Guy Tann <grt@xxxxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: August 30, 1999 17:26
Subject: RE: Is drawdown meaningless?
> Glen
>
> I'd like to think we do better than with flipping a coin. I see your
> point. The drawdowns I was referring to were intratrade drawdowns.
> That's why we restrict our initial investment to no more than 25% of risk
> capital, keeping in mind that we're never 100% correct (don't I wish).
> What we worry about is having to bail out of trades that go against us,
> where we're ultimately correct.
>
> Regards
>
> Guy
>
>
> -----Original Message-----
> From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]
> On Behalf Of Glen Wallace
> Sent: Monday, August 30, 1999 3:14 PM
> To: MetaStock listserver
> Subject: Is drawdown meaningless?
>
> 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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