Drawdown

StrataSearch will find what you tell it to, but what should that be? Will the same criteria work across different Sectors? Different time periods? Here we discuss the ins and outs of OneClick Searches.

Drawdown

Postby JLG » Tue Nov 20, 2007 12:35 pm

Many one click searches generate much different drawdown levels with fixed equity than variable equity. It seems that to be conservative when evaluating strategies over the longer periods of time (5-10 ten years) where compounding would be important and equity investments would be variable, that focus should be on the variable equity assessment of drawdown.

While default settings for scoring are approprately based on fixed equity (except for MAR ratio), it woud seem that drawdown might be based on variable equity like compound return. I understand this can be changed but was interested in the rationale for using a fixed equity source for drawdown scoring.

Is it simply inappropriate to use a mix of fixed equity and variable equity sources in evaluating a strategy or system?
JLG
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Postby Overload » Tue Nov 20, 2007 3:28 pm

You're correct about the differences between Fixed and Variable Trade Equity reports. With Fixed Trade Equity, you're investing the same amount per trade regardless of how much money you have in your account. Because of this, each trade is a smaller percentage of your overall equity over time (assuming your overall equity increases). That can lead to not only a diminished APR from one year to the next, but also to diminished drawdowns of your equity.

I'd agree that using Variable Trade Equity would minimize this issue, allowing you to evaluate both returns and drawdowns as a percentage of the equity available at that time. And you certainly have the option to make that change. But it's obviously important to remember that using Variable Trade Equity exclusively would have its own share of problems. In particular, the cash return of trades will be weighted more heavily at the tail end of the spectrum since there will be much more money in the account at that time.

We stuck with Fixed Trade Equity exclusively just to maintain consistency in the example searches. But again, you're more than welcome to make the change if you wish. I can't think of any reason why you couldn't mix them however you see fit.

Pete
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