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Risk, return, drawdown

  • #1
  • First Post: Jan 12, 2021 1:39am Jan 12, 2021 1:39am
Here is my dilemma, probably every traders dilemma. What is the right balance or what is the reasonable balance (lets assume they are the same thing)?
You constantly hear that low risk is the key. Is it, if I want to grow my money and use my money, not just having them in my account, for sake of having lower drawdown and maybe attracting investors ?
Here is the real life example. It is one good calendar year of my portfolio, with relatively high drawdown and relatively high profit. Rik "x" and risk "x/2".
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I am using active money management and compounding effect and you can see that there is a big difference in the end of the year. The big problem with low risk is that the profit growth is exponential and the drawdown growth (with higher risk) is linear. In this case 3 times less capital with the higher risk will make the same profit in terms of $ amount. And what you risk, you risk twice as high max drawdown. If you convert this drawdown in to $ amount actually you are risking less money for making the same profit and you can have this money in your bank account for other needs .
What do you think about this?
  • #2
  • Jan 12, 2021 2:55am Jan 12, 2021 2:55am
a. First of all, great performance (in both accounts)! Over how much time is this?
b. The first thing I noticed after, is the low success %% of your trades. I have no idea how you trade,
but maybe halving your number of trades for only the ones you have most confidence in, might even further
improve your performance.
c. I would without doubt go for the higher risk, because
- the equity graph shows CONSISTENT growth
- your DD's are not shocking as a %% of equity
- the ultimate result is over 3 times higher
  • #3
  • Jan 12, 2021 3:46am Jan 12, 2021 3:46am
I guess this is backtested result? For live account it should be “period’s start balance” or “deposit/withdrawal” instead of initial deposit. Maybe i am wrong

Backtest or not, a higher risk approached is preferred for aggressive strategy. profit factor if 1.6 looks good if live traded.

if this is real account, I guess you have to do copy trading to generate the two portfolios (1 trade more on one acc?). Should take a close look at the actual entry/exit of the trades and compare. One acc may be overestimated/underestimated because of lag and slippage

if this is EA backtest, the trade cost is constant (underestimation). The actual growth is discounted. If the strategy is applied 24/5 without trading hour, the growth is further discounted in live.

Good luck!
  • #4
  • Jan 12, 2021 3:55am Jan 12, 2021 3:55am
Quoting fxke62
a. First of all, great performance (in both accounts)! Over how much time is this? b. The first thing I noticed after, is the low success %% of your trades. I have no idea how you trade, but maybe halving your number of trades for only the ones you have most confidence in, might even further improve your performance. c. I would without doubt go for the higher risk, because - the equity graph shows CONSISTENT growth - your DD's are not shocking as a %% of equity - the ultimate result is over 3 times higher
This is one calendar year. It is portfolio of 5 automated strategies. Ignore the curve. Some years are worse some are better, it depends what are the market conditions. If I knew which trades have less chance for succeeding they would not be in the picture. These are the optimal settings for the systems based on long term performance (15+ years). The question is why most of the traders and professionals in the trading industry are taking less risk and talking about lower DD 20% and less what is the purpose of this?
  • #5
  • Jan 12, 2021 4:09am Jan 12, 2021 4:09am
Quoting tommydoginti
I guess this is backtested result? For live account it should be “period’s start balance” or “deposit/withdrawal” instead of initial deposit. Maybe i am wrong Backtest or not, a higher risk approached is preferred for aggressive strategy. profit factor if 1.6 looks good if live traded. if this is real account, I guess you have to do copy trading to generate the two portfolios (1 trade more on one acc?). Should take a close look at the actual entry/exit of the trades and compare. One acc may be overestimated/underestimated because of lag and slippage...
This is based on backtests, but my backtest are made with worse condition that the actual live trading conditions, so usually live is even better, but this is different topic.

I am trying to understand if I am missing something in my thinking process?
  • #6
  • Jan 12, 2021 4:45am Jan 12, 2021 4:45am
There are several ways how back-testing can give deceiving results compared to reality. But it is hard to be concrete if you don't give some indication of how your bots trade:
are they scalping, arbitraging, catching long term moves..? Slippage, non constant spread in real trading, flash crashes etc. The first two are unlikely to alter your picture substantially. The last for sure can (DD and result).

"The question is why most of the traders and professionals in the trading industry are taking less risk and talking about lower DD 20%". Many of them are working with OPM and have therefore set risk parameters that either their employer or investor wants them to abide by. If you work with your own money that is of less importance.
But even then, recovering from a 20% DD takes a 25% profit only to get back. 30% DD almost 45%. 50%DD 100%.

I have been back-testing for many years already, but the value of "over the past 15 years" I highly doubt. Markets have changed in "behavior" substantially over the past decade (markets always change) and individual pair behavior changes too. Compare results of any strategy with the same settings for the past 5 years versus year 6-10,
and you will see big differences.
  • #7
  • Jan 12, 2021 8:04am Jan 12, 2021 8:04am
Quoting fxke62
There are several ways how back-testing can give deceiving results compared to reality. But it is hard to be concrete if you don't give some indication of how your bots trade: are they scalping, arbitraging, catching long term moves..? Slippage, non constant spread in real trading, flash crashes etc. The first two are unlikely to alter your picture substantially. The last for sure can (DD and result). "The question is why most of the traders and professionals in the trading industry are taking less risk and talking about lower DD 20%". Many of them...
I know that backtests can give different results, that is why I am usually testing with higher cost (spread, swap) I don`t have slippage very often. In the end I am comparing live trading with backtests like this one
I don`t trade systems that have not been profitable since or survived without significant drawdowns since 2004 or even 1999. Markets can change , but some inefficiencies remains, if you trade something that has not been profitable long time ago, probably it will not be profitable long time in the future.
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  • #8
  • Jan 12, 2021 8:13am Jan 12, 2021 8:13am
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I know this table, but still, my work shows me that it is not a big issue. Maybe the psychological part is more of an issue
  • #9
  • Jan 12, 2021 8:26am Jan 12, 2021 8:26am
Quoting Fmz
Here is my dilemma, probably every traders dilemma. What is the right balance or what is the reasonable balance (lets assume they are the same thing)? You constantly hear that low risk is the key. Is it, if I want to grow my money and use my money, not just having them in my account, for sake of having lower drawdown and maybe attracting investors ? Here is the real life example. It is one good calendar year of my portfolio, with relatively high drawdown and relatively high profit. Rik "x" and risk "x/2".{image} {image} I am using active money management...

These are great results either way so well done.

Regards 'low risk' this is the mantra of brokers and guru's that want you to trade forever and a day to keep them in commissions. in reality the amount you risk should always be in direct correlation to your trading method.

Also bear in mind that most retail traders load their account with all the trading funds that they have - it doesn't make sense. load the account with the maximum amount you need to run our strategy. i run on about 10% for example, if i was willing to allocate 50k to a strategy then i would load the account with 5k and use all the leverage available. That is what leverage is for.

At the end of the month move the profit back into your allocation - so if you made 3k from that 5k then leave 5k in the account and more the rest into your trading bank. - MAKE SURE YOU PAY YOURSELF

Just remember what happened with Alpari and FXCM - never ever have more in your trading account than you need and run the account efficiently, you can always add more in.
https://linktr.ee/Soultrader
  • #10
  • Jan 12, 2021 11:23pm Jan 12, 2021 11:23pm
Once you have a positive expectancy investment strategy you begin to ask yourself these questions. Of course, the answer is logically your drawdown should never exceed what you can personally handle, within reason.

So, again it all comes down to psychology. If a drawdown of 30% does not effect your psychology or interfere with executing your strategy effectively then you may be able to do it and still come out profitable at the end of the period. For someone else this type of drawdown may have a crippling effect.

On the other hand, there is also the reality of being realistic, and having realistic expectations to accomplish when it comes to investing. If most traders on average don't return more than 20% per year on average, expecting to make 600% on a live account without blowing your account does not seem very achievable, outside of pure luck of course.

In the end, I think you need to put real money up and see how you feel. Your account size will effect your drawdown tolerance immensely. I do think that however, if your account is too small to begin with you probably will need to take a bigger risk in the beginning, and slowly decrease your risk as your account size grows relative to your psychology and realistic probability of outcome.

If you are looking for an investor I wouldn't focus so much on low risk, but rather profitability in general. If you can show an investor a portfolio with consistent returns, and they say for example don't like the max dd, you can simply reduce the investment size per trade when managing the investor capital to their liking.
  • #11
  • Jan 13, 2021 2:45am Jan 13, 2021 2:45am
There are a few key points for making big returns without the need of luck or taking excessive risks a.k.a. having reasonable drawdowns.
Actually you can see this in my images and the results - 3 times more profit with 1.8 times higher drawdown.
The higher return is with 2% risk per trade, the lower with 1%, there is no excessive risks, just a few low correlated long term profitable trading systems and the holly grail of trading compounding (the same that made W. Buffett the Oracle of Omaha) it s just math and it works.
  • #12
  • Jan 15, 2021 6:30am Jan 15, 2021 6:30am
I can trade EA for 5 pip gains, but the call down is huge. but the profit curve during the test is fantastically good.
you need a huge bank account here.

LOL.
  • #13
  • Jan 15, 2021 3:11pm Jan 15, 2021 3:11pm
Good subject and reasonable questions
First, I've benefited from the views of the members.
Secondly, I think you should have a good risk management before you start any actual trading.

For your question about the choice of large traders for small risk levels for a small profit rate is that they are targeting another goal not to trade but to maintain their assets taking into account an annual increase greater than the current inflation rate.

As for the levels of the maximum drawdown in my opinion not to exceed 20% : 35% of the total amount allocated for trading because with the process of back testing strategies based on previous risks known and recorded, the real account will deal with current risks you do not know and you cannot predict their size so you must have in your account an insurance amount that will be able to deal with those unknown risks.

regards,
Ahmed
  • #14
  • Last Post: Feb 3, 2021 10:39pm Feb 3, 2021 10:39pm
Hi, just sharing for simplify reading of Revenue, DD, RR, performance/return in daily/periodically.
Here is EA to read all of those in real time.

regards
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