How to compare drawdown metrics? - Traders Hideout | futures io social day trading
futures io futures trading


How to compare drawdown metrics?
Updated: Views / Replies:1,298 / 7
Created: by Koepisch Attachments:0

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors Ė all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you donít need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 
Thread Tools Search this Thread
 

How to compare drawdown metrics?

  #1 (permalink)
Elite Member
@ Germany
 
Futures Experience: Beginner
Platform: NinjaTrader
Broker/Data: Mirus Futures/Zen-Fire
Favorite Futures: FDAX
 
Posts: 441 since Nov 2011
Thanks: 254 given, 369 received

How to compare drawdown metrics?

Hi,

i want to compare strategies in terms of drawdowns. Currently i have build an underwater chart which visualizes the max. Drawdown in % at a given point of time. If i have a large set of strategy results i can't compare the charts manually anymore.

So here are my final questions:
Is there any common formula or set of a few numbers which can quantify the "risk" from an underwater charts data?
How do you measure drawdowns?

"Risk" should be larger if:
* max. drawdown is higher
* recovering time from drawdown is higher
* the occurence (count) of drawdown peaks are higher
* the distribution of drawdown peaks is erratic

Thanks,
Koepisch

Reply With Quote
The following user says Thank You to Koepisch for this post:
 
  #2 (permalink)
Quick Summary
Quick Summary Post

Links to that topic

http://www.freeman.tulane.edu/trading/pdf/UlcerIndexExplained.pdf

http://www.futuresmag.com/2009/10/01/the-ulcer-index-a-better-measure-of-risk


Last edited by Koepisch; November 13th, 2012 at 12:01 PM. Reason: Ulcer Index
 
  #3 (permalink)
Market Wizard
Cleveland Ohio/United States
 
Futures Experience: Advanced
Platform: Tradestation
Broker/Data: various
Favorite Futures: futures
 
Posts: 2,388 since Jul 2012
Thanks: 1,139 given, 4,387 received
Forum Reputation: Legendary

Answer
This post has been selected as an answer to the original posters question Answer



Koepisch View Post
Hi,

i want to compare strategies in terms of drawdowns. Currently i have build an underwater chart which visualizes the max. Drawdown in % at a given point of time. If i have a large set of strategy results i can't compare the charts manually anymore.

So here are my final questions:
Is there any common formula or set of a few numbers which can quantify the "risk" from an underwater charts data?
How do you measure drawdowns?

"Risk" should be larger if:
* max. drawdown is higher
* recovering time from drawdown is higher
* the occurence (count) of drawdown peaks are higher
* the distribution of drawdown peaks is erratic

Thanks,
Koepisch


You could use something like the Ulcer Index. A good article on that: http://www.freeman.tulane.edu/trading/pdf/UlcerIndexExplained.pdf

Or, calculating the area of the drawdown curve would incorporate time and magnitude.

A few years back Futures Magazine had a good article about measuring and quantifying drawdowns. I don;t remember exact date or article name though.

The problem, in my experience, is that no one number incorporates everything that may matter to you. For example, is a 1 day drawdown of 10% better/worse than 5 day drawdown of 2%? Both would have the same area under the drawdown curve. Some people care more about magnitude, some care more about time.

Personally, I have found the MAR ratio (annual % return / max % drawdown) to be the best metric that uses drawdown. That's just me of course.

Reply With Quote
The following 3 users say Thank You to kevinkdog for this post:
 
  #4 (permalink)
Elite Member
@ Germany
 
Futures Experience: Beginner
Platform: NinjaTrader
Broker/Data: Mirus Futures/Zen-Fire
Favorite Futures: FDAX
 
Posts: 441 since Nov 2011
Thanks: 254 given, 369 received

Thanks @kevinkdog,

it's true that a single number can't describe drawdown completely. But you give me enough stuff to think about. It seems that i can enhance the Ulcer index to fit my needs.

Because i want to see the max. risk over a period, i start the strategy run multiple times with the same initial amount at EVERY day in the period (for instance 1 year = 365 runs) and save the max. drawdown in % at every day. Is that the normal way to build an underwater chart? The other way is to let it run only once and calculate the drawdown from the cumulative last high of the account.

Whats a "good" MAR ratio?

Koepisch

Reply With Quote
The following user says Thank You to Koepisch for this post:
 
  #5 (permalink)
Market Wizard
Cleveland Ohio/United States
 
Futures Experience: Advanced
Platform: Tradestation
Broker/Data: various
Favorite Futures: futures
 
Posts: 2,388 since Jul 2012
Thanks: 1,139 given, 4,387 received
Forum Reputation: Legendary


Koepisch View Post
Thanks @kevinkdog,

it's true that a single number can't describe drawdown completely. But you give me enough stuff to think about. It seems that i can enhance the Ulcer index to fit my needs.

Because i want to see the max. risk over a period, i start the strategy run multiple times with the same initial amount at EVERY day in the period (for instance 1 year = 365 runs) and save the max. drawdown in % at every day. Is that the normal way to build an underwater chart? The other way is to let it run only once and calculate the drawdown from the cumulative last high of the account.

Whats a "good" MAR ratio?

Koepisch


I have never calculated dd the way you describe (running it multiple times at every day), so I can't really comment on that method.

Many times I'll use a Monte Carlo analysis to look at it - if I start with $X, and trade for a year, what are the odds that I'll have a maximum drawdown of %Y sometime during the year?

For MAR Ratio, I usually use a 3 to 5 year period for analysis. By going to a reporting service, you can see what CTAs (the "pros") do. Of course, their results are after fees. Nevertheless, comparing yourself to pros is a good benchmark.

1:1 is pretty decent. This would mean that over a 3 year period, I averaged a 30% compounded annual rate of return, with a 30% maximum drawdown. 2:1 would be really good over that same time period. There are some people who get over 3:1.

One fly in the MAR ointment is that it can't predict future drawdowns. Some people with really high MAR ratios might be that may because of hidden risk they are taking that just hasn't been realized. Eventually, they will probably blow out (unless they stop trading first!).

Reply With Quote
The following user says Thank You to kevinkdog for this post:
 
  #6 (permalink)
Elite Member
Northern Germany
 
Futures Experience: Intermediate
Platform: NT
Favorite Futures: FDAX, CL
 
vvhg's Avatar
 
Posts: 1,583 since Mar 2011
Thanks: 1,016 given, 2,807 received

There are many metrics that can be used to describe a system's performance or risk. To name just a few more, there are Sharpe ratio CALMAR ratio SQN by Van Tharp and many more...
Personally I think they all have their value, but it is alays dangerous to look at just one set of data (the original trades), so it is always a good idea to run a Monte Carlo over it. Unfortunately that in itself is a science and an art
A point that @kevinkdog already has made, but can't be stressed enough is to look at hidden risks.

vvhg

Hic Rhodos, hic salta.
Reply With Quote
The following 2 users say Thank You to vvhg for this post:
 
  #7 (permalink)
Elite Member
@ Germany
 
Futures Experience: Beginner
Platform: NinjaTrader
Broker/Data: Mirus Futures/Zen-Fire
Favorite Futures: FDAX
 
Posts: 441 since Nov 2011
Thanks: 254 given, 369 received

Thanks, for you comments. Because i'm not a naitive english speaker it's a little harder for me to describe what i'm doing. "My" method is like monte carlo simulation. But instead of mixing the trades i START the strategy run at different dates (per day granularity) on the exact same set of trades (real trade sequence is still valid). The results are held in ONE drawdown series and the highest value is saved. So i can see the max risk (drawdown) in that period without having the profits distort the picture. A monte carlo version of "my" method would blast my pc. I (think to) know how to use of monte carlo analysis, but because my current strategy (results) is (are) very cyclical it isn't the first choice currently. Cyclical drawdown periods are the best to have - i can easily detect these periods and can filter out a huge portion of it.

"Hidden Risk" are the risk which be hidden if i use only a few numbers as metrics? My initial issue was to filter down the set of strategy results regarding the drawdown. Finally i look always at my underwater chart. I hope there are no hidden risks.

Reply With Quote
The following user says Thank You to Koepisch for this post:
 
  #8 (permalink)
Market Wizard
Cleveland Ohio/United States
 
Futures Experience: Advanced
Platform: Tradestation
Broker/Data: various
Favorite Futures: futures
 
Posts: 2,388 since Jul 2012
Thanks: 1,139 given, 4,387 received
Forum Reputation: Legendary


Koepisch View Post
Thanks, for you comments. Because i'm not a naitive english speaker it's a little harder for me to describe what i'm doing. "My" method is like monte carlo simulation. But instead of mixing the trades i START the strategy run at different dates (per day granularity) on the exact same set of trades (real trade sequence is still valid). The results are held in ONE drawdown series and the highest value is saved. So i can see the max risk (drawdown) in that period without having the profits distort the picture. A monte carlo version of "my" method would blast my pc. I (think to) know how to use of monte carlo analysis, but because my current strategy (results) is (are) very cyclical it isn't the first choice currently. Cyclical drawdown periods are the best to have - i can easily detect these periods and can filter out a huge portion of it.

"Hidden Risk" are the risk which be hidden if i use only a few numbers as metrics? My initial issue was to filter down the set of strategy results regarding the drawdown. Finally i look always at my underwater chart. I hope there are no hidden risks.

When I refer to hidden risk, it means events/situations that haven't occurred yet, and that you might be at risk if they occur...

Example 1: Let's say you are betting martingale style. You start out betting 1 unit, and if you lose, you double your next bet again and again until you win, and then you go back to betting 1 unit. Depending how things go, you might have a nice equity curve, with small drawdowns. BUT, eventually with this method the bet size will get so big you will blow out your account. So, the risk (of ruin) is there all along, you just have not experienced it yet.

Example 2: You write naked options for premium. Depending how you do it, you might make a few percent per month, every month. Equity curve looks nice. Then, bam! - a black swan event happens. You get wiped out. No way you could have seen that coming from just the equity curve or any statistics. Every market crash claims many victims this way - people who thought they had an ATM machine that consistently gave out cash.


So, the point I am trying to make is that there are risk measures which can be used on backtest or historical results. At the same time though, there is a market axiom that says "your biggest drawdown is always in front of you."

Kevin

Reply With Quote
The following user says Thank You to kevinkdog for this post:

Reply



futures io > > > How to compare drawdown metrics?

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Jigsaw Trading: TBA

Elite only

FuturesTrader71: TBA

Elite only

NinjaTrader: TBA

Jan 18

RandBots: TBA

Jan 23

GFF Brokers & CME Group: Futures & Bitcoin

Elite only

Adam Grimes: TBA

Elite only

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
Trading Metrics for journals/record keeping Big Mike Psychology and Money Management 928 September 10th, 2017 04:40 AM
Compare two Symbols Allansun NinjaTrader 4 November 13th, 2014 12:43 PM
FXCM June 2012 Monthly Metrics Big Mike Reviews of Brokers and Data Feeds 1 July 16th, 2012 05:40 PM
How does ESignal compare to other platforms? JohnPS eSignal 10 June 24th, 2011 12:47 AM
Compare the difference of one indice to another williammanda NinjaTrader 8 September 17th, 2010 05:56 PM


All times are GMT -4. The time now is 05:09 PM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-12-14 in 0.15 seconds with 33 queries on phoenix via your IP 54.221.73.186