You wrote : “However you define drawdowns, I’d certainly call the trade you describe, where the account doubles and then goes back to where it started, extremely risky.”
No Sir, it is not an “extremely risky” trade, it is simply a break-even trade (google for “break-even trade”), NO real out of the pocket money was ever lost. Of course a simple trailing stop could have prevented that loss of open profit but the fact remains that no money was ever deducted from your trading account when you closed the trade.
On the other hand, if you lose 50% of your trading capital on a single trade now THAT is an extremely risky trade.
You write : " If you’re potentially doubling your account on a single trade, you’re taking way too much risk on that trade."
Not necessarily, for example if you short the S&P 500 just before a major stock market crash you could quadruple your account with virtually zero risk. Making a ton of money on a single trade does not mean you are betting the farm, far from it.
Back in 2008 for example you could have doubled your account in a single day/trade in the Forex market as each currency pair routinely moved 1000 pips and more each day (almost 10 times the average daily range!), without risking more than 2% of your capital, assuming of course you were on the right side of the market.
From a futures trader’s perspective, we get marked-to-market at the end of each trading day. So, although a long or short position may be left open between sessions, it’s as if we are starting a new trade each day.
So from our perspective, if our account went from $50,000 at the end of day one, to $100,000 at the end of day two, to $50,000 at the end of day three, we experienced a 50% drawdown.
However, except for keeping within margin maintenance requirements, what happens intra-day doesn’t matter. If we started out with $50,000 at the start of the trading day, went to $100,000 in the middle of the trading day, and back to $50,000 again at the end of the trading day, the drawdown would, technically, be zero.
Jack wrote: "However, except for keeping within margin maintenance requirements, what happens intra-day doesn’t matter. If we started out with $50,000 at the start of the trading day, went to $100,000 in the middle of the trading day, and back to $50,000 again at the end of the trading day, the drawdown would, technically, be zero"
Correct.
Does C2 label an intraday trade that opens at 50, moves to 100 and closes at 50 (on the same day), an “extreme” drawdown?
That’s a good question.
Clearly the maximum intra-day excursion is tracked, since both the date and time that occurs is posted. This, sometimes, means a trade will show a greater drawdown than it would have by going with the daily mark-to-market results.
Sure there are always outlier profitable trades but it’s a fundamental truth of trading that big profits = big risk. The risk may not be obvious but it’s always there. As Matthew says in his article, if anyone actually had a high profit, low risk strategy, you’d never see it here at C2. The owner would be too busy trading it from his/her private island with his/her private army guarding the code. 
As far as I can tell, the intratrade drawdowns are calculated as a % of the account equity. That’s useful if the model account is a realistic size but it will overstate the risk if the model account is too small and understate it if the account is too big. I’ve seen examples of both here at C2. You really need to dig deeper into the numbers to get an accurate picture.
Sorry guys - maximum open trade drawdowns do matter. We recently had this discussion on another thread and I have to agree now with Matthew. In providing back tested statistics a developer should state both: maximum open trade drawdown from peak to valley and maximum closed trade drawdown.
A good article about that you can find at:
http://www.andromedafutures.com/drawdowns.html
Just think of it this way: If a trade goes from 50 to 100 and then falls back to 50 you could have removed the 50 at the peak and when it falls back to 50 you most likely will be hit by a margin call.
Quoting Dennis:
"if anyone actually had a high profit, low risk strategy, you’d never see it here at C2. The owner would be too busy trading it from his/her private island with his/her private army guarding the code"
I disagree. There are some of those types here.
The challenge is finding one that provides for ample liquidity to buy that island.
Hello Iris,
You wrote : “Does C2 label an intraday trade that opens at 50, moves to 100 and closes at 50 (on the same day), an “extreme” drawdown?”
Yes, in your example C2 will label this trade as extremely “risky” (in the risk column) and report it as a 50% drawdown (EXTREME).
Potential subscribers will see one or two EXTREME in the risk column and say : “Oh no, no way I am going to subscribe to that system, it is too risky”, while in fact the 50% “drawdown” could simply represent a loss of OPEN PROFIT.
Don’t get me wrong, I have nothing against reporting intra-trade drawdown but this could confuse (and more importantly scare) a LOT of potential subscribers, especially the newcomers.
At the very least C2 should report the intra-trade drawdown AND the real drawdown (real out of the pocket loss) and let the potential subscribers decide.
Yup, the whole point is the volatility of the equity curve is a proxy for risk. That’s the basis of the Sharpe ratio although Sharpe is usually sampled at long time intervals so it hides a lot of Bad Things that may have happened between samples.
Disagree. The reported DD is a % of total account equity, not a % of the max profit during the trade.
Developers who are worried about scaring subscribers should just trade smaller or use a bigger account. You only need to make 1%/month to make it onto the hot lists. Of course I don’t really care much about protecting developers, I’m more concerned about protecting subscribers.
Hey Iris,
I have to say, yours is one of the few systems at C2 I like. Too bad EMD can’t handle any size. Have you tried it with TF? I daytrade both and TF has similar characteristics with a lot more volume.
IMO the biggest risk in trading, and one I’m no longer willing to take, is holding a position when the markets are closed. It was just dumb luck that I wasn’t long the stock futures on 9/11. I know people who had their accounts wiped out and ended up owing their brokers money. That’s when I went back to the drawing board and became a daytrader. I want to be awake and listening to CNBC when I have a trade working so I can (hopefully) hear that the markets are about to close and get flat.
You start with $5.000, you buy 50 shares of IBM at $50 a share with a 3% stop. IBM goes from $50 to $100 back to $50, what is the drawdown as far as C2 is concerned?
That’s right, a 50% drawdown, even though the trader did not lose any money during the entire trade.
Well enough on that subject for me, have a good weekend everyone.
Dennis, I didn’t mean to sound self-serving. How much size do you want to trade? There are still 3 open slots after which the system will close to new subs. 
I haven’t looked at TF, but will do so over the weekend. How many contracts at market do you think it can handle with a couple of ticks of slippage?
I for one am happy that C2 would label a trade that goes from 50 to 100 then back to 50 as extreme risky.
This risk label is only one of many criteria that a potential subscriber should look at. If it scares subscribers then the risk warning are having their intended effect.
Which intraday trade is hypothetically more risky? The one that opens at 50, goes to 100 and closes at 50, or the one that opens at 50 goes to 1 and closes at 50?
Do they deserve the same risk identifier label?
"I haven’t looked at TF, but will do so over the weekend. How many contracts at market do you think it can handle with a couple of ticks of slippage?"
I dunno. I’m a small trader and I’m into the portfolio thing. I’ll always add a new symbol rather than more size until I run out of symbols. I figure there are about 30 of the US futures good for daytrading and I’m not trading all of them yet.
Of the stocks, here’s what I have for the Thursday volume of the electronic contracts during the pit hours – guestimating, adding up volume and down volume from the charts in my head.
ES 178,000
NQ 92,000
TF 55,000
YM 36,000
EMD 12,000
ES clearly wins on its ability to handle size but the ticks are kinda coarse compared to the daily range.
It’s interesting that no one has mentioned there are ways for a vendor to manipulate the trade risk designations in their favor.
The first one is a bit dangerous to attempt, since most experienced traders will see right through it; just trade highly-correlated instruments (ES and YM, for example). Your equity curve will, probably, look the same as if you traded only ES, but all your trade risk designations will be much lower.
The second one most vendors stumble upon by accident. But, if you have a lot of pesky “high” and “very high” risk trades on your record, they can all be made to disappear in an instant. All you have to do is one thing…
Oops, sorry Iris. I forgot I had the charts set to show tick volume rather than contract volume. As a 1-lot guy, I care more about ticks/minute than contracts/minute. Here are the pit-session volumes in contracts.
ES 960,000
NQ 190,000
TF 71,000
YM 52,000
EMD 15,000
Iris,
For me as a trader…
Any trade that causes my system equity to go from 50 to 100 then back to 50 is extremely risky.
Any trade that causes my system equity to go from 50 to 1 then back to 50 is extremely risky.
I would not waste time to figure out which is more risky. I would not follow any system that has that degree of risk (either example) in their trading.
This is my personal risk tolerance and trading preference. For someone that can handle a trade that affects their system equity as you describe, more power to them.
