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> I understood that DD was the lowest dip in equity following an equity
> high. So if a system reached, say 1925, fell back to 550 and then
> rose to 2100 the DD for that period would be 1375 (1925-550). In
> percentage terms I view that as a 71% drop - 1375/1925*100.
To clarify: in Tradestation, DD is calculated by looking at the
highest CLOSED equity minus the lowest INTRA-TRADE equity.
Yes, it is a 71% drop **within that trade**. That's not the way
you generally compute DD. Your friend has the right idea -
usually you're more interested in your ACCOUNT'S drawdown than in
any particular trade's drawdown.
> It seems to me that you could claim the DD in the above calculation
> was only half that by saying you need an account size of $20K. Or
> let's start with an account size of $50K so the DD would only be
> 2.75%.
That's exactly right. If you trade system X, which shows a $10k
drawdown, your ACCOUNT will have very different drawdowns
depending on how big it is. Assuming you trade the same position
size, a $100k account would show a 10% DD, a $20k account would
show a 50% DD, and a $10k account would be wiped out.
> So, if two systems had exactly the same performance but one had twice
> the starting capital requirement of the other, it's DD would be half.
CTAs and others who manage client money often under-leverage
their trading to control drawdown. If system X produces $20k per
year with that $10k drawdown, and the client is conservative, you
might trade one unit of X in a $100k account. You limit the DD
to only 10% of the account while returning 20%, and the client is
probably happy. If another client is more aggressive, you might
trade TWO units of X in his $100k account (or 1 in $50k). He's
willing to sit through a 20% DD, and he's rewarded with a 40%
return.
Gary
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