![]() Also, generally your max draw down is not a function of your current wealth unless it is a local minimum or similar local minimum metric, according to standard market practice. Make sure you understand that going practice is that most draw down calculations apply a moving window which means your maximum draw down is a function of the local maximum within the observation window not a global maximum. Thus if you start out with 1 million xyz currency units and suffer a loss on the first trade of 100,000 xyz then you suffered a 10% draw down. Generally draw downs are measured on invested capital not raw pnl. ![]() Other assumptions may solve the problem, but arbitrarily different decisions for initial value will lead to different drawdown calculation results.Ī second thought about drawdowns regard their effectiveness do you think that simple variation calculation might give a better insight regarding the strategy's risk? And even then - how would you combine average profit and variance? And how would you calculate the variance - every trade? Every day? Around 0 or around the line connecting the final profit with 0 during the period? Or around the linear regression?Īnd if linear regression is involved - why variance and not, say, standard error? ![]() For backtesting purposes, I always assume the net value of the "robot" is 0, and from that point on it makes profits or losses. The problem arises when the first "peak" of the trading strategy is of value 0. The drawdown (at least according to Wikipedia), saves a peak's value, and for every value later which is lower than the value of the peak, calculated: ![]() I am trying to find an indication for risk, something like Sharpe ratio or Sterling ration for that, I thought of using the (maximum) drawdown measurement, but have encountered a problem. I am developing a trading strategy for currencies. ![]()
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