I have a question which I can’t resolve regarding this ADP indicator, and I invite clarification.
If my understanding is correct, the ADP is calculated from the max low point (drawdown) of a trade, to the point it is closed.
Thus, a trade with a small difference between drawdown and close would be judged a “less risky” than a trade with a large difference between drawdown and close.
If so, then what is the case of a trade that closes for a loss? If the close of the trade -at a loss - is closer to the max drawdown for a trade, would that trade not then be rated as ‘better’ than if the trade had closed at a profit - or at a point even higher than the max drawdown?
And if this is the case, then would not the trader who closes at a loss, closer to the max drawdown, receive a better rating for that trade, than if he let it run to a profit, which is farther from the drawdown?
In all of the explanations and discussions of this indicator, I have seen only references to ‘profit’, and no explanation for how it is calculated, if at all, for a losing trade.
David,
Ross in another thread explained this:
"mostly (from track record):
1) eliminate all rows with "No Calc" in max DD
2) Summation of max drawdown column
3) Summation of net profit column
4) H&H indicator = #3 / #2 "
So if you close a trade at a loss instead of a profit, then - all other things being equal - the sum in #2 will be smaller while the sum in #3 will remain the same. So the index will be smaller, indicating more risk - as it should.
The point where your argument goes wrong is this sentence:
"Thus, a trade with a small difference between drawdown and close would be judged a "less risky" than a trade with a large difference between drawdown and close."
It is not true that a small difference between drawdown and close would be judged less risky. It is the ratio of profit to drawdown that matters. So if the close is at a loss, it will be judged more risky then if the close is at a profit. For example, suppose for simplicity that there is only one trade with a long position. If O is the opening price, C the closing price, and D the drawdown, then the index is not C - D but (C - O) / D.
If there are more trades, then the index is Sum(C - O) / Sum(D). This is an increasing function of all closing prices. That is, all other things being equal, closing one or more trades at a higher price will always increase the value of the index.
That expression C - D was supposed to have absolute value signs that were lost. Please read abs(C - D) for it.
Jules, thank you for taking the time to clarify.
