Risk & Drawdown (Revised)

In response to user feedback, I’ve modified the Risk Assessment next to each trade. Now the risk assessment will take into account the drawdown versus the account size (as opposed to drawdown versus eventual profit, which, I admit, did return specious results).

No doubt this new set of refinements will cause a lot of system developers to become irate as many of their trades will suddenly be rated as “Extreme” or even "Reckless."

If you are a system developer and have a complaint about a specific trade, please post it here and I’ll be happy to look into it.

Note that my goal here is to help traders evaluate the risk entailed in trading a system. Keep in mind that risk is not inherently bad. Extreme risk in pursuit of extreme return is often justified, at least in the context of a properly structured portfolio. However, it’s important that traders at least get a sense of the risk style employed by a trading system before beginning to trade it with real money.

Also, on a more general level, I want to try to make Collective2 reward trading systems that pursue a sensible risk vs. return strategy. I want to discourage reckless gamblers, over-margined accounts, etc. This is in the interest of traders, and thus in the long-term strategic interest of this site. I believe that currently Collective2 unfairly rewards trading systems that “swing for the fences” (that is, that place huge bets and luckily win) versus those that place smaller, more sensible bets.

Feedback is always welcome, of course. The algorithm will continue to be refined.

Thumbs Up!

Looks like there’s a bug when the P+L of the trade is exactly zero. A trade of mine is labeled ‘extreme’ in that instance when the drawdown was only $125.

Good job Matthew with the quick logic fix. For a moment, you had me believe that I was a reckless runaway rogue trader…lol. Now if only I can have you fix the logic behind… Well, never mind, you’re too busy.


Can you please tell us the criteria you use for the different ratings?

And this might be nice also to take an average of the rating and put the classification in the summary page of the systems.


- Fanus

Just having taken a very quick look at this, I would say that I do not agree with the nomenclature attached to each trade… “reckless”? Do trades have such characteristics? Reckless is foolhardy, impulsive etc.

I would agree with ‘degrees’ that it took for a certain payoff, (i.e., numbers, levels, MAE or MFE etc), but not use of adjectives.


I got one private message from one of my subscriber, please help me

answer this question.


XXXX XXXX 2/13/06 (14:05) Goofiz Foliage’s Future ATM Hi, Im using your system, and just reviewed C2 and see real high unrealized drawdowns on some of your trades. Ive only traded one of your recommendations, but on that one, you initiated a stop loss that wasnt too far from the initial opening position. Since you use fairly tight stops, do you know why C2 would show your system with such high unrealized drawdows. I would think your trade would have been stopped out before a drawdown of $8,800.00 shown on 1-26-06, for instance.

The strategic investment matrix defines with reward and risk along each axis with the Prudent at high reward/low risk, Aggressive at high reward/high risk, Conservative at low reward/low risk and Speculative at low reward/high risk which are the 4 basic investment styles.

reckless reward/reckless risk strategy would be “irresponsible” or “irrational” does not fit into these 4 basic investment styles.

I echo the sentiments of Dr. Bart Diliddo of the Vector Vest Advisory service, who says:

"Every investor needs to define a realistic set of goals, the amount of risk they can handle, and a feasible investment plan.

Every investor has an intuitive sense of their own risk/reward profile. They feel it in their bones, and it dictates their investment patterns. Speculators and traders thrive on volatility and savor the thrill of making a fast buck. Conservative investors cringe at the thought of a capital loss, and patiently reap small rewards. Without knowing it, each of us has an investment style which is distinctly our own. A key to becoming a successful investor is in recognizing your investment style, and in trading systems/instruments which are consistent with that style."

May be the risk terminology may be revisted with these 4 basic investment styles in mind.

Why the value of “Risk & Drawdown” changed for my trades?

Today’s value is different from yesterday’s valve for every

trade. My trades already closed. The value of "Risk & Drawdown"

is time sensitive or fixed?

If it is a bug, I hope you can do a well test before you add this

feature to C2.

To matthew: Could you send an email to all C2 subscribers before

you add this feature? At least, you should let subscribers know

what you are doing.

Your subscriber thinks you should have stopped out your trade when the loss reached $8,800. But you didn’t. I’m not sure why this is a matter for Collective2 to look at. It’s your trade and you decided to let the drawdown reach that level. Again, whether it’s an effective trading style is not for me to say, but a nearly 9,000 drawdown on a $100K account is worth knowing about.

As to why the values of the drawdown assessments changed, it is because this is a new feature, and I have been modifying the way the system determines the risk associated with each trade. I have publically posted quite a bit about this over the past 24 hours (in this very thread, in fact).

Things will stabilize over the next few days as I work any kinks out of the algorithm and take into account the large amount of user feedback I have received.

Great improvement! It really reflects risk now IMHO.

My subscriber sent me a private msg:

XXXX XXXX 2/14/06 (11:14) Goofiz Foliage’s Future ATM

David, I saw Matthews response to your question, in which he said that the $8,800.00 was correct. I assume he means that the trade went at least $8,800.00 down based on the 40 contracts you bought. Obviously, this is $220.00 per contract. On your most recent trade of 2-9-06, C2 shows the trade down $6,400.00, or $160.00 per contract. I dont have the charts for these trades, so I dont know whether Matthew is right, or not. However, I dont recall the 2-9-06 trade ever being down $160.00 per contract at any one point in time. If it was, and if the other trade mentioned was down by $8,800.00, then Matthew is, of course, right about the amount of unrealized drawdown per trade. If he is right about the dollar amount, as a subscriber, I would be interested in knowing what percentage the amount shown is (whether its $6,400.00 or $8,800.00) of the total account. Is Matthew using $100,000., or is using the Buy Power of $167,600. It makes a big difference percentage wise, because $8,800.00 is 8.8% of $100,000., and “only” 5.2% of $167,600. I know Matthew has worked long and hard on this issue. If hes going to use a drawdown and risk factor, I think he should show the percentage of the account the system provider has, instead of dollar loss. Because, when your total “Buy Power” reaches $4 to $500,000., an $8,800.00 unrealized drawdown would only be about 2%. As you can see, its a big deal to me, and probably lots of potential subscribers to know how much in PERCENTAGE of their account they may have at risk, because each of your subscribers will trade only 0ne, two or 10 contracts at a time, and should know what the percentage risk is. If you want to send this email to Matthew, please feel free to do so. I wish he would show a percentage risk for each system, because a dollar figure of $8,800. might be extreme to an account with a Buy Power of $100,000., but minimal to an account with a buy power of $500,000. Sorry for the long post, but Im trying to sort things out here, and I didnt think your stops allowed for as much unrealized drawdown as what C2 shows, based on what I read in your posts.

Excellent revision. When I first saw the risk assessment yesterday, I thought what baloney!! Today however, I see an authentic reflection of the risk per trade. Congratz!

As a new systems developer here, I can only applaud your goals of both encouraging sensible lower risk strategies and making them “available/visible” to the general public of potential traders. I’m assuming that once you have tweaked your risk assessment strategy which is starting to look pretty good, then that will become part of both the 1-click searchs as well as highlighting systems that actually “succeed” in such a strategy.

I agree with your guess about Matthew’s algorithm on “risk and

drawdown”. (percentage of account balance, day low for long

position, day high for short position). But I dare to say that

Matthew goes on the wrong way. Do you see any person or

institution comments on one trade? It is meaningless to some

extent. To evalue a trading system, we need to find out history

backtest records, max drawdown from statistics points of view,

average yearly return, average win and lose per trade. market

capital of the traded stock, future, etf, option…The most important

thing is whether the system can keep winning money, not one day

or only in a short term.

Let us go back to your guess about Matthew’s algorithm, Can we

have a conclusion that if I day trade one share stock XXXX with

price $1.00, every time I lose $0.50. Suppose I have this trade

50000 times on C2, I guess C2 will evalue every trade has

low risk and drawdown, (if I am not correct, please correct me matthew) but from account balance point of view, $25000 was lost.

So what does this new feature can help us for system developer or

trader? Statistics is the key for trading system, stop loss limit is

the key for single trade. How many shares or contracts are based

on market capital and system performance. (liquidity, win / lose

ratio and average return) Does C2 know all about these?

I suggest you do not consider this feature at this monment. At

least it is not matured now.

Your example above does not include the complete picture. If you have a system losing constantly like you describe above, no one will look at it as it will have a losing record. The rating would be correct if it show it as low risk per trade. This doesn’t mean this is a low risk system. This will just mean this is a consistently losing system, losing a little bit at a time.

Where the trade ratings come in really valuable is when someone review a system with a winning track record, but when looking at the trade by trade results can see the system have huge drawdowns on each trade, just to make a few points each time. A system like that is heading for disaster eventually.

I think the only people who will complain about this feature would be the ones who let the trades go against them allot consistently before maybe squeezing out a very small profit. You cannot see this kind of data in annualized return, max drawdowns, etc, which btw, is already available.


- Fanus

I agree completely Fanus.

Those who complain that the trade ratings don’t give the big picture are missing the point. The main page for each system (Trading System Results) gives overall statistics on each system (largest drawdown, W/L ratios, etc). The trade details by their very nature are specific to each trade which is not available just by looking at the system overview.

Exactly Fanus, well explained.

I noticed this morning that three of my current holdings were suddenly rated as high risk/drawdown. After looking at them closer, it appears this is an error. The max drawdown is equal or near to the total equity of the position. I’m guessing the system was unable to pull the correct price of these stocks at the open, so it gave them an incorrect drawdown. Matthew, can you please look into this?


The risk/drawdown mods you have put in place are a good start. It’s a bit simplistic in that it measures risk on an individual stock basis relative to the portfolio size. This is a measure of risk as it pertains to individual stocks. Carrying this a step further, if I concentrate all my stocks in one sector, then I have greater portfolio risk as they are more likely to move together than not. Furthermore, if I concentrate my stocks all in one direction, there is added risk to the portfolio for that time period that I am so positioned. There’s also added risk if I have all stocks trading in one time frame, and so forth. There’s more than one way to both manage and measure risk.

By saying this, I’m not suggesting that you measure risk in all these ways nor is it possible to do some of them. I only say this to suggest that it’s not a simple measure which some may think nor is it wholly programmable as others suggest.

What is important, in my mind, is to present data to users of the CS system that allows them to make informed decisions about who they may align themselves with from an advisor perspective. If I were looking for an advisor the things that I would care about would be whether the advisor is trading what I trade, how fast they trade (day/swing/etc) and what they cost (you have these covered nicely) and what their track record is over time.

Over time implies:

a) monthly

b) quarterly

c) yearly

d) since inception

Track record implies:

a) win/loss record

b) average win versus average loss

c) cumulative returns/losses for the above time frames

d) drawdowns for the above time frames

I would like to see your 1-click searches allow a user to consider potential systems through some sort of matrix of these statistics. Some you have currently, some you don’t. I recognize that you are probably swamped with ideas and priorities, but as a new advisor to CS, I thought I should offer this newbie perspective before I become totally acclamated to the way things are.

There are so many errors with this new feature caused by quote errors, it is very nearly impossible for Matthew to correct them all (with over 1400 systems at C2), which make this trade by trade analysis futile to base any concepts on. My own systems has so many errors with this new feature, I just gave up in despair to identify them all. Trading is difficult enough. We sure dont want this new feature to compound it. It is going to pose a nightmare situation for MK to correct them all. I wonder whether it is worth it. Please all, have a heart and consider this new feature impossible to implement for closed positions. As one wise moose said, it is the only the end result that counts.

If virtue consists in recognizing how vicious a system is, true virtue is impossible for a system. Then the trap would be closed on the system creators. The better systems would then give up any ambition to be exactingly good and other systems would give up any hope of reform. This would result in system-wide self-abasement and centuries old rule of irrationalism.

Right now, I am ready to give up on C2, due to the errors caused by C2 margin call feature which does not consider bogus quotes like Not found() for current price when quotes fail and closed majority of the positions to meet this margin call. It is simply incredible for me to believe that this is still happening, i.e., the margin call feature just does not take into account the bogus quotes.