• Registered: 2017-07-24
  • Posts: 99

Topic: Max Equity Drawdown: % Vs. Absolute Dollars

The typical metric of Max Equity Drawdown has always most often been expressed as a percentage of the current account size.

If you are not using lot sizes that change proportional to your account size, this does not make mathematical sense to me. Profits are expressed in absolute dollar amounts, so isn't drawdown?

The problem with expressing Max Equity DD as a percentage is that if the largest drawdown occurs at the beginning of a time period, the percentage DD will much greater than if it occurs later (assuming the strategy's profit is generally trending upwards).

The Max DD could occur at any point in the tested time period. The size of the account has no bearing on the likelihood that the Max DD will occur.

For example, if we test over a period of ten years, starting with an account size of $100,000 and we have an immediate $20,000 DD, then Max DD% is 20%. If in the first nine years this strategy earns an optimistic $100,000 profit followed by this same $20,000 DD, the Max DD% is only 10%. The only numbers that matter are the absolute Max DD of $20,000 and the ORIGINAL account size of $100,000. This could basically be considered a worst-case scenario of 20% Max DD no matter where the DD occurs.

However, if you are using a lot size that is a percentage of the value of your account, then the Max DD% is the correct metric to use. This is because the absolute DD will scale with account size, so the current DD can only be compared with the current account size (or rather, the current peak account size).

  • Popov
  • Popov
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Re: Max Equity Drawdown: % Vs. Absolute Dollars

It makes sense.

We have max absolute drawdown in currency in FSB Pro.

http://s11.postimg.org/ze5yfuryb/screenshot_379.png

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3 Reply by qattack (edited by qattack 2017-08-12 16:36:34)

  • Registered: 2017-07-24
  • Posts: 99

Re: Max Equity Drawdown: % Vs. Absolute Dollars

Yes, I have been using absolute Max Equity DD, but not as Acceptance Criteria, as I think an optimal ME DD will depend upon what some of the other metrics are.

Does anyone have any thoughts on the uses of Max Balance DD vs. Max Equity DD? I think the Max Equity DD is actually more significant?

I have observed that with some strategies, the Equity Line is nearly always above the Balance Line; with others, it is nearly always below the Balance Line; and still others fluctuate around the Balance Line.

The strategies where the Equity Line remains significantly above the Balance Line seem to all be strategies that Add to a winning position. Often these strategies rise significantly above the Equity Line, before taking a sharp dive. The larger the climb, the sharper the dive, which makes sense considering larger positions are open at this point.

Those where the Equity Line remains below the Balance Line don't have nearly as much variance; the Stop Loss (I set it to always use) curbs the downside pressure. These strategies are a mix of Adding and no Adding (Nothing).

Those that follow the Balance Line almost religiously are most often No Adding strategies, or if they are Adding strategies, the positions are Reversed or Closed instead of Reduced.

Is there any inherent benefit to strategies where the Equity Line mostly remains above the Balance Line compared to those whose Equity Lines are most often below the Balance Line (given that other stats are roughly identical)?