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).