Manipulation of Risk/Drawdown/APD stats

As you know Broadsword Forex crashed a few weeks ago so I have been using the last few weeks to test out a few theories I had and came up with some interesting findings that I thought you might like to hear.

First a bit of background. The system crashed on Sept 4th, I wrote a ‘mea culpa’ post here at the time taking full responsibility and explaining the circumstances. Afterwards I noticed the 6 month C2 renewal fee was due at the end of the month and as I wasn’t intending to continue trading it I thought it would give me an opportunity to play around for a few weeks before it expired and was killed officially. I should also point out that now you can see all the closed trades please don’t think for one minute those were the sizes I was running at the time it crashed!, those are the sizes after I have been experimenting with piggyback trades which I will go into in a moment. For the record when it crashed I was long just 40 EUR/USD, 40 USD/JPY, 80 GBP/USD, 60 AUD/USD and 210 EUR/JPY, which shows you that is plenty big enough but nowhere near what’s shown now.

The sizes shown now are the result of many many piggyback trades. This allows you to have many trades within one position, ie BTO 50, STC 49, BTO 50, STC 50, you are still long just 1 contract. There are I’m sure many valid reasons why someone may want to do this but transparency certainly isn’t one of them so I would be wary of any system that practices it.

What I discovered is it’s perfectly possible to manipulate the ‘drawdown & risk’ statistics and in turn the APD. For example under closed trades take a look at the 4th and 5th ones down opened 9/1 in GBP/USD and AUD/USD:


BTO 430 1.76707 9/1/08 9:26

STC 430 1.77106 9/26/08 10:59

It shows a final profit of $17,184 and a max drawdown of just ($222) and is given a ‘Low’ risk rating. The reason? Because the max drawdown is measured in pips (price) not in dollar amount. If you hover over the ($222) you will see that it shows the calculation of it by simply taking the greatest adverse price and multiplying it by how many contracts were open at the time it reached that price.

The same is true of the AUD/USD trade below it

BTO 4,362 0.80043 9/1/08 9:28

STC 4,362 0.80264 9/26/08 10:59

max drawdown ($314) final profit $96,439.

In both cases the real max drawdown was in ten’s of thousands, in AUD case maybe over 100k, but once I got each one into a profit I just left it with one contract, that’s why the GBP/USD trade had (just) 430 contracts whereas the others I had to keep going.

To further prove the point look at the trade below those two

BTO 5,435 EUR/JPY 152.465 8/7/08 19:47

STC 5,435 152.199 9/26/08 3:29

max drawdown ($137,304) final profit ($137,304)

The interesting thing on this one is it shows the risk to be ‘low’ despite having lost $137k, the reason is simple, hover over the max drawdown figure ($137,304) and it shows the worst drawdown as 513 pips and amount open at the time as 1 contract, so the key thing here is I had to close this position before I was able to game it back to a profit but had I managed to get it profitable the ($137,304) figure would then become ($513) and the final profit whatever I close it out as, so you’re sort of seeing a before and after here with how it works, it sits in a negative knowing that the max dd was actually reached on 1 contract but until you get the position in profit it has to show it as a loss, so in other words the dd was over ($140,000) but if I had got this profitable it would have changed to just ($513).

Needless to say this radically changes your APD, having a supposed tiny drawdown on just 1 contract but a final huge gain is the perfect trade for APD. Before I closed my final positions I had managed to get my APD to go from -0.20 back to 0.32, still not an impressive APD I know, but the point is it was possible to manipulate and unless someone was prepared to examine every trade with a fine toothcomb you would never know what had gone into achieving it.

Additionally I don’t understand why I was still able to trade right towards the end when I was already heavily underwater, once the account is at zero that should be it, your money is gone. Before i placed the last trade in CAD yesterday I still had $143k buying power, I made money today and then closed the remaining positions with 1 contract open and suddenly with no positions open my buying power went down to -60k. It doesn’t make sense to me that had I have left the 1 contract positions open I could have traded, but once they’re closed and the real position revealed I could not, again this provides a great cloak for misdeeds.

Bottom line

1. DD’s should be calculated by worst dollar amount not price/pips difference x contracts open at time

2. Once a system has lost all it’s capital it shouldn’t be able to trade anymore, because you certainly wouldn’t be able to at a real-life broker.

3. Also as I said before there may be perfectly valid reasons why someone would want to do piggyback trades never closing a position but transparency is definitely not one of them.

Excellent analysis Jon!

This is already known. That is why I detest vendors who don’t just open and close trades. This rolling contracts up and down while keeping some open does nothing except to confuse the track record AND the stats.

It also is used in averaging down. Close the darned trade. Don’t play games with it.

What they are REALLY doing, is gaming the track record - keeping it hidden.

When I evaluate a system, I look at its the OPEN price of the first entry, look at the CLOSE price of the final exit, and THAT is what I consider that trade. Wish that was how C2 recorded all trades. It would take away the desire to average down also.

One vendor shows one closed trade, and has been keeping all his activity hidden - a “trade” open for weeks-months (cannot remember which one - saw it a couple of days ago).

Their stats should probably show up as ??? instead of numbers. It is patently unfair.


Thanks for finding and reporting on this problem.

I think it needs to be fixed, and the way I’d like to see it done is to quit book-keeping add-on trades as part of one trade. If a trader puts on a new position, it should be reported as a trade. If the position is added onto at some future time, that should be a standalone trade as well. This will correct the APD problem Jon reported, and another as well. If a trader doubles down 8 times and ekes out a small profit, C2 reports that as 1 winning trade and 0 losing trades. In reality, there were 7 losing trades and the one winning trade (the last double down bet that recouped all the other losses). Novice traders put too much weight on winning percentage and C2 is masking the real winning percentage when it book-keeps all open positions in one instrument as one trade.

That’s an interesting idea. I can see how some people who genuinely scale into a position might not like it though. I think it’s generally accepted that there are very valid reasons to add to a winning position but not to a losing one, so maybe the best way to implement it would be to only allow additional trades to a winning position, if you are adding to a losing position it must be a separate trade.

I think the people who successfully scale into trades would be the ones who’d like it most. Systems that do a good job scaling in like MVP-3 and Trending Futures would look even better to the novice trader. Instead of getting credit for 1 win, they’d get credit for two or three wins.

“That is why I detest vendors who don’t just open and close trades. This rolling contracts up and down while keeping some open does nothing except to confuse the track record AND the stats.” - Index

Yes and no. While I understand what you’re driving at, such a generalization is inaccurate. There are vendors who “roll in” and “roll out” their trades, as part of their risk management process. I applaud this, and follow this practice myself. In fact, I believe this is an important discipline for a seasoned trader (depending on what’s being traded).

There are many vendors, however, who simply “average down” with little rhyme or reason. Identifying them is a simple matter, as most of their averaging down is done contra to their trade direction (they increase their long position when price goes down, and vice-versa). The “good” ones are adding to their long/short as price increases/decreases, respectively.

Don’t throw all “staggered entry/exit” vendors into the trash pile, please.

"Identifying them is a simple matter, as most of their averaging down is done contra to their trade direction"

I would not say that most customers or traders coming into C2 would find it simple. As Jon said, it allows serious manipulation. I find the person who said that it should be recorded as a separate trade as interesting, although all the ramifications would need to be explored.