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In my opinion, the right way to measure DD is the way Daniel described it (or Tomas Stridsman) but I dont think the question about "what to do ..." if the DD breaks the measured Max DD have been answered totally.
I had planned to bring this question up on the list because I have thought about it so it would be interesting to hear from more people´s.
Regards
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Hi Todd,
in my opinion is the way you describe the Drawdown totally wrong.
You shouldn´t give the Strategy Report in TS any value because it just tells
you the $ amount of the drawdown- not when and where ist happend....
You should learn to think in terms of % rather than in terms of $.
Let me give you an example:
Lets say you bought a stock at 100$. You sell it at 90$. So your drawdown is
after this trade 10$ or 10%.
The next time you buy that stock is at 200$. This time you sell is at 190$.
So you drawdown is again 10$. But the main and most important difference:
this drawdown was only 5%- half the drawdown when the stock traded at 100$.
So, when you test a strategy the $ amount of drawdown is useless beause it
doesn´t tell you when and where ist happend.
Best wishes from Bayreuth,
Daniel
----- Original Message -----
From: "Todd Hoff" <gatrboots@xxxxxxxxx>
To: "Omega forum posting" <omega-list@xxxxxxxxxx>
Sent: Monday, April 28, 2003 12:44 PM
Subject: when a strategy breaks the max drawdown
> Hello Everyone,
>
> I could really use everyone's thoughts on this topic
> which always seems to happen to me. Sorry if this
> topic has already been discussed:
>
> In your opinion, when or by how much do you
> realistically stop trading your strategy when it
> breaks the max historical drawdown?
>
> For example. Let's say, that I back-tested my strategy
> for the last 5 years and the max historical drawdown
> on this e mini sp system on a 1 contract basis was
> $3,000. I was once told that we should give it some
> leeway when ,in real time trading, it approaches the
> max drawdown. Someone told me once to give it 20%. So
> in this example, we would stop trading the strategy
> when it reached $3,600. Others have told me give it
> 50%.
>
> I don't know if it is just murphey's law or just some
> not so great systems, but every system that I have
> traded, always breaks the max drawdown substantially
> and it usually falls apart after trading it real time.
> It seems that we just never know how much to allow
> the system to exceed the max drawdown.
>
> Sometimes I have stopped trading a system too early ,
> when it barely broke the max dd and then recovered and
> other times, I might have given it even too much
> leeway when it broke the max dd, since it continued
> drawing down even after stopping it.
>
> Your input will be very welcome and helpful to me.
>
> Thanks,
>
> Todd Hoff
>
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