The Ugly Drawdown

Quoting Jason

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I think that the only way you can make a worthy comparison like this is to simultaneously analyse an identical longer timeframe for all currency pairs considered. Then you can select an appropriate weighting to give to any one currency based on it's performance under your system over an extended period of time.

I don't think you can have confidence in your changes if you make them only looking at a small 'bad' period of time - what are the repercussions on the total system over the whole test period - try to look at 3 or 4 years worth of data.

Also are you confortable changing your balance from being 50%GBP, 50%USD to something more like (from eg1) 30%GBP, 30%USD, 20%JPY, 10%AUD, 10%EUR to try to fix a single drawdown period. What does this do to your entire system in the long term? Does it provide better % return, less drawdowns, smoother equity curve, sensible diversification - are you spreading yourself too thin over too many markets?

Would 33%GBP, 33%EUR, 33%JPY by using GBP/USD, GBP/JPY, EUR/USD, EUR/JPY be more appropriate by giving no one currency any more influence on your total return than another? Not all currency pairs will be profitable all the time.

There are many things to consider with diversification - I am no expert on what they all are. But my advice is to think long term. One or even six months of flat or negative return on one currency pair is insiginificant on it's own when you are analysing 4 years worth of trades with a properly balanced, risk managed system.

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Quoting tdion

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I'm not a PB subscriber (yet) but I just wanted to show a nasty drawdown my own system experienced in late 2006.....

I guess the point I am trying to make is that any system of rules will not work all the time. Had somebody started trading my system in 2006, they would have lost 22 times in a row (the circle.) However, they would be up over 5,000 pips over the past 3 years.

This business revolves around good, bad, and ugly.

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Quoting tdion

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On Easter Sunday I started this thread about a dynamic risk allocation for dealing with drawdown:

http://www.forexfactory.com/showthread.php?t=23617

It is not magic, but might be a nice backbone for a dynamic var feature in the future.

Regards.

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Quoting tdion

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Al,

I am setting up to trade a large fund of money with my own system. Here are some ideas I have:

Suppose I have $100,000 of venture capital. I will put $90,000 of it in a 1 year CD at my bank. I will only trade $10,000 (10%) over the course of the year.

That way, my customer is risking no more than 10% in a year, and actually less because the CD will return 2% on $90,000.... it is almost risk free for them.

As for the $10,000 that goes into the market: I am risking 3% per trade until the account drops below $9,000. At $9,000 I change my risk/trade to 1%.

Over the past 6 years, the lowest return would have been 12% (on $10,000) or 1.2% on the entire $100,000.

I have had years where I made 300%, which translates to a 30% gain on the $100,000.

Obviously, this framework is very low risk and the returns are limited. However, it may give you some idea on how to treat larger clients. I have considered risking 1/3 of the $100,000, and removing 50% of the profit every 6 months. That way, if I have a losing 6 month period, I can replenish the account back to it's original size in most cases.

I hope you find this helpful,
Tom

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Quoting aicccia

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A good rule of thumb I use when making a system is to not let the max drawdown % be more than the % of account I use per trade.

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