Quote from www.meridiansam.com.
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Please realize that the National Futures Association (NFA) requires that the calculation of maximum drawdown includes open-trade-equity (unrealized profits and losses). However, in our research we have found that this calculation can be exceptionally misleading. For example, assume a trade is placed in a clients account; it initially becomes a losing trade of $1,500 before turning-around to have an open profit of $100,000. Before exiting the trade it gives back $60,000 and is then closed-out for a profit of $40,000. In this example a drawdown of $60,000 would be recorded despite the fact this trade actually generated a $40,000 profit and never drew against the accounts realized equity more then $1,500.
An investor unfamiliar with how maximum drawdown is calculated may erroneously infer that a stated maximum drawdown of $60,000 implies that if they began trading the portfolio at that particular moment their accounts value would decline $60,000 below their initial investment. Why is this assumption erroneous? Because new clients are never placed in the middle of existing (open) trades. Thus, in the above example the $60,000 drawdown would never be realized without the offsetting $100,000 run-up.
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Grid “max DD” description is contrary.
Is c2 “unfamiliar with how maximum drawdown is calculated”?
No…but the c2 Grid description implies that in part c2 interpretation of max DD is “erroneous” as above website suggests.
Suggest the following:
"The Max Drawdown is used by many traders as a measure of the reserves above margin requirements needed to trade the strategy. For strategies that use ‘trend-following’ or ‘let profits run’ systems, this may not be the case. A part of the drawdown can be due to open-equity profit retracement."
Also suggest description on systems stats page as per “?” for education purposes.
The same point is readily apparent from my methods (Magnum (Conservative) Futures equity curve at C2. There was a runup to $112k and then a retracement to $80k in open profits at which point the drawdown as reported by C2 jumped from 17% to 23.25%, as if I actually lost that much money instead of making $80k! In this case, I’m being penalized for making money! Talk about reward and punishment (risk). At C2, one gets punished for virtue (letting profits run) and gets rewarded for vice (cutting profits short and honoring every stop - the equivalent of being getting dinged to death; the creed of death worship). This is a utter perversion (inversion) of morality.
As you and the www.meridiansam.com website says, because new clients are never placed in the middle of existing (open) trades or nobody in the right mind would start trading positions in the middle of existing (open) trades, this depiction of the performance of a system is totally misleading and inaccurate.
A closed equity curve is the best way to fully represent the true performance of a method. It should be readily apparent that subscribers are being fooled and decieved as to the true performance of a method by being denied the chance to take a look at the closed equity curve of a method but for day-trading systems (scalping machines) for which the closed equity curve is the open equity curve (as EOD equity is being plotted at C2), they are being touted as the holy grail, without realizing that day-trading is the dark underbelly of the futures market!
MK,
Note that introducing a closed equity curve (accounts realized equity) in addition to the current open curve, would illustrate the example listed the mentioned website.
ps. I am not suggesting to change the current statistical calculations.
Let me first point out to everyone that what Domenic is saying is very different from the theories that Pal is dropping all the time about drawdowns. If you buy 1000 NFI at $28 and the price goes to $8 before you close the trade at $29, this would still be a $20K drawdown according to Domenic. So let us please focus on what Domenic says and try to stay on topic at least in the beginning of this thread.
It is true that the open equity drawdown tends to punish the use of a trailing stop as opposed to a profit target. A long term system that utilizes trailing stops will probably show a drawdown before a trade is closed, unless that is accidentally covered by an opposite move of other positions in the portfolio. I have heard this from other vendors too.
I agree that the usual interpretation of a drawdown, as derived from the open equity curve, is misleading in the example Domenic gave. Indeed it assumes that the new subscriber opens all open positions of the system in his own account too. This would happen if the subscriber uses the synchronization feature of TradeBullet, but not if he is only following the signals that are given after the beginning of his subscription.
The equity drawdown also does not necessarily agree with the "drawdowns" that are given in the trade details: You can, at least in theory, have a drawdown of 0 in each trades while the equity has substantial drawdowns.
It would be interesting therefore to have, in addition to the current concept, also another concept of drawdown that agrees with the drawdowns in the trade details (i.e., relative to the opening prices). To avoid confusion I would suggest to use a different name for that, like "portfolio adverse excursion".
It will be different to implement it soon. The advanced statistics program takes only open equities as input by design. MK has probably a lot of other things to do.
So for the near future it is probably best to explain the phenomenon with a tooltip, like Domenic suggests.
"It will be different to implement it soon."
different -> difficult
Domenic - That was an excellent explanation, which all users who study the equity curves or system stats need to know about. Thank you for bringing this to the attention of the general public here.
>Please realize that the National Futures Association (NFA) requires that the calculation of maximum drawdown includes open-trade-equity (unrealized profits and losses).
I disagree. This is not a requirement but left clearly as a choice.
Please realize that collective2 is not governed by the National Futures Association. Therefore, attempting to clarify whether or not the calculation of maximum drawdown must include open-trade-equity is irrelevant to this thread.
Personally, I’d be interested in knowing a system’s draw-down with the exclusion of OTE. I’m more interested in its net effect against my reserves and initial investment amount than in open trade equity, which doesn’t affect my initial reserves.
>If you buy 1000 NFI at $28 and the price goes to $8 before you close the trade at $29, this would still be a $20K drawdown according to Domenic.
It doesn’t matter what Domenic thinks. What matters is the truth and reality. For a lot of people the concept of a Drawdown means realized losses.
>It is true that the open equity drawdown tends to punish the use of a trailing stop as opposed to a profit target.
I don’t use any stops (neither trailing or hard), but it still punishing.
>You can, at least in theory, have a drawdown of 0 in each trades while the equity has substantial drawdowns.
Portfolio drawdown is measured from portfolio equity. Trade drawdown is for single trade and measures change of value of single trade. So trade drawdown can be higher than system drawdown if trade is NOT entered with 100% of equity. If there is 0 trade drawdown in all trades, the portfolio equity drawdown is 0.
>It would be interesting therefore to have, in addition to the current concept, also another concept of drawdown that agrees with the drawdowns in the trade details (i.e., relative to the opening prices). To avoid confusion I would suggest to use a different name for that, like “portfolio adverse excursion”.
Trade drawdown is not the same as MAE because MAE is measured from ENTRY to TROUGH value of trade, while max. trade drawdown is measured from PEAK to TROUGH value of trade (is higher than MAE). You are confusing MAE with your false definition: “portfolio adverse excursion.”
>It will be different to implement it soon. The advanced statistics program takes only open equities as input by design.
It should be very easy to implement and the advanced statistics program should be taking only closed equity as input.
>MK has probably a lot of other things to do.
Yeah right, but he has time to work on things like chatter box…
"It doesn’t matter what Domenic thinks."
What matters is that he doesn’t think like you, because what you think doesn’t matter to most people here. Please stop obscuring a sensible discussion with your comments.
>Please realize that collective2 is not governed by the National Futures Association. Therefore, attempting to clarify whether or not the calculation of maximum drawdown must include open-trade-equity is irrelevant to this thread.
I realize that, but a false statement was made and I found it obligatory to set it right.
>Personally, I’d be interested in knowing a system’s draw-down with the exclusion of OTE. I’m more interested in its net effect against my reserves and initial investment amount than in open trade equity, which doesn’t affect my initial reserves.
I would be too. The arbitrary (i.e., a stolen concept like open-drawdowns) is worse than the false (i.e., incorrect drawdown recorded caused by an incorrect exit price recorded). The false has a relation, albeit negative, to the facts of reality; it has reached the field of human cognition and invoked its methods, even though an error has been committed in the process. This is radically different from the capricious. The false does not destroy our ability to know; it does not nullify our grasp of objectivity; it leaves us the means of discovering and correcting our error. The arbitrary, however, if one indulges in it, assaults our cognitive faculty, it wipes out or makes impossible in one’s mind the concept of rational cognition and thus entrenches our inner chaos for life. As to the practical consequences of this difference, whom would you prefer to work for, talk to, or buy groceries from: a man who miscounts the people in his living room (an error), or who declares that the room is filled with demons (the arbitrary)?
Whatever…
Sadly, one of your better replies.
It is still amazing that you seem to think that something like a 90% current drawdown is not meaningful, because it is not yet closed. Or 98%.
After all, there is still the possibility of divine intervention…
But do you agree that the suggestion of Domenic is very different from that?
>you seem to think that something like a 90% current drawdown is not meaningful, because it is not yet closed. Or 98%.
Precisely. If a system/method is designed for eg., to withstand 96% drawdown (for say 48 positions) with the odds of that ever happening would be 1:55567 ( a slim to no chance) because not all positons would be incurring a 2% drawdown at the same time…
>After all, there is still the possibility of divine intervention…
I thought you were a skeptic, but now you are saying that you are a mystic too… You are confusing me…
Who cares? You remind of the witch doctor to atilla the hun…
Again: Stop obscuring the discussion! This thread is about the suggestion of Domenic, not about your idea of a closed equity drawdown. If you want to discuss that then open an other thread for it.
Whatever…
The arbitrary (i.e., a stolen concept like open-drawdowns) is worse than the false (i.e., incorrect drawdown recorded caused by an incorrect exit price recorded). The false has a relation, albeit negative, to the facts of reality; - Palsun
What is the point of correcting an error, when the correction neither applies to anything nor anyone in here, and is of no relevance now or later? Is it not better to focus time and energy on problems that fall within the context of our conscious experience, or that are at least material to same?
I am not surprised that Palsun does not like the classical drawdown definition here. I just studied all his systems:
-- 2 systems have neared/exceeded the -100,000 level in system drawdown
-- 1 exceeded the -25,000 level in system drawdown
-- 1 neared the $0 level in system drawdown
-- 4 neared the $45,000 level in system drawdown
-- The remainder are too new or too schrizophrenic to consider for ever subscribing
He had the same whining against APD. OF course, his systems have terrible APDs, so again, not surprising. He only likes the stats that seem not to paint him too badly. This is a child who throws temper tantrums, and doesn't like it when others actually look at him with a critical eye.
This is also someone who has little concept of the realities of trading. But I think Lew has done a good job as anyone at pointing this out.
He has been deleting certain posts on his own forum, that are too critical of poor Palsun. His own forums are the only place he can rant and self-praise, mostly safe from being challenged, like Barkley of Star Trek Next Generation. Only at home on the Holodeck.
No wonder Palsun has also whined at MK and the entire C2 site as being of questionable value (actually, he used much stronger words).
Palsun is a person who lives in a dream world, uses long-winded prose to avoid criticism, and STILL as of yet, I have struggled to find him adding anything of much value (except a couple of times).
