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Hi Gary,
> > 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.
Just to clarify this point, the drop we were talking about didn't happen
in just one trade but during several trades during the life of the
system so I would have said that the *system* showed such-and-such (71%)
a DD.
The figures were just an example and were, in fact, intended to be the
actual account equity amounts although as quoted they are probably a
little low. We could multiply them by 10 so let's say we start with a
$10K account, get up to $19.25K and then fall back to $5.5K. That would
still give the same percentage drop making the "account" 71% down by my
figures but 14% by his. Is this right?
Whatever the size of your account, you're still losing $X. Saying the DD
is 14% makes it sounds reasonable but we're really talking about a
$13.75K drop and that's a lot whether on a $10K or $20K account.
Sheesh! I probably haven't got the hang of this yet... (:-)
So when system vendors quote a certain percentage DD, they're doing it
your way, is that right?
So is a 14% DD a good figure?
Ian
> > 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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