The lowest drawdown system ever been published? | Forex Factory

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The lowest drawdown system ever been published?

  • #1
  • First Post: Feb 23, 2007 3:13am Feb 23, 2007 3:13am
Which system has the lowest drawdown you know - the system that is posted here in FF or anywhere elsewhere?

I have heard successfull professional traders talking about a 5-10% drawdown, but what's the lowest drawdown system that has ever been published for free on FF or anywhere, to the small fishes like me?
  • #2
  • Feb 23, 2007 9:51am Feb 23, 2007 9:51am
the lowest drawdown system ever is staying out of the markets. it has no drawdowns.

Quoting EasyComesItGoes
Which system has the lowest drawdown you know - the system that is posted here in FF or anywhere elsewhere?

I have heard successfull professional traders talking about a 5-10% drawdown, but what's the lowest drawdown system that has ever been published for free on FF or anywhere, to the small fishes like me?
  • #3
  • Feb 23, 2007 10:31am Feb 23, 2007 10:31am
Sell at the absolute top. Buy at the absolute bottom.
  • #4
  • Feb 23, 2007 3:10pm Feb 23, 2007 3:10pm
Quoting drayco
Sell at the absolute top. Buy at the absolute bottom.
Ah, but a system that could do that all the time would still have drawdowns in open equity.

Throwing a drawdown figure like 5% out there means nothing if you don't attach a return to it. For example, Trader A has a 100% return and 10% drawdown and Trader B returns 10% with a 1% drawdown, they will both have the same risk/return ratio. Drawdown is simply a function of leverage; the higher the leverage the higher both return and drawdown will be. What you should be measuring with is risk in relation to return.

To answer your question. I'm sorry, but I have no idea.
  • #5
  • Feb 25, 2007 4:24pm Feb 25, 2007 4:24pm
Quoting faure
Ah, but a system that could do that all the time would still have drawdowns in open equity.

Throwing a drawdown figure like 5% out there means nothing if you don't attach a return to it. For example, Trader A has a 100% return and 10% drawdown and Trader B returns 10% with a 1% drawdown, they will both have the same risk/return ratio. Drawdown is simply a function of leverage; the higher the leverage the higher both return and drawdown will be. What you should be measuring with is risk in relation to return.

To answer your question. I'm sorry, but I have no idea.
If i were to buy (enter) at the absolute bottom and hold to sell (exit) at the absolute top, there would be no drawdown at all. Then to sell (enter) at the absolute top and hold to buy (exit) at the absolute bottom yields no drawdown at all. Where is the drawdown on open equity?
  • #6
  • Feb 25, 2007 4:57pm Feb 25, 2007 4:57pm
Quoting drayco
If i were to buy (enter) at the absolute bottom and hold to sell (exit) at the absolute top, there would be no drawdown at all. Then to sell (enter) at the absolute top and hold to buy (exit) at the absolute bottom yields no drawdown at all. Where is the drawdown on open equity?
Who do you deal through? I have been looking for a Borker with Zero Spreads.

btw. Buying at the absolute bottom of a Run is akin {also known in the trade} to "Catching Falling Daggers." (not House of Flying...)
  • #7
  • Edited 4:17pm Feb 26, 2007 2:34pm | Edited 4:17pm
Drawdowns are the loss of capital during a trading program. If one looks at the trading program as an integrated whole, then drawdowns are not necessarily a bad thing. They are simply a part of a good trading system, just as stops, losses, and wins are part of a trading program.

The trader who has an independent aversion to drawdowns is being irrational. Let's consider, for example, a trading system with 75% wins and an average RRR of 1:1. This is an excellent trading system. It is extremely profitable. About 25% of the trades will still be losses, however. To minimize drawdowns, one must minimize the Risk Factor. The lowest drawdown will come from the lowest risk factor, which is 0%. To minimize drawdowns one should not trade at all. However, the trading system is successful. So to not trade is to forego profits. Therefore, the irrational aversion to drawdowns will result in the sacrifice of profits.

If one has a successful trading system, one should maximize drawdowns in order to maximize the profitability of the trading process, not minimize them. One should employ the maximum risk factor, which will produce the maximum return on investment. By employing the maximum risk factor that is possible, one will maximize both drawdowns and profits. However, the maximum drawdown within an acceptable probability of failure must still be less than 100% of capital, otherwise the trading program will fail. This is the only rational limitation on risk factor and drawdowns - avoidance of failure.

To reduce drawdowns one can only do four things - improve win rate, improve reward / risk ratio, decluster losses and reduce risk factor. The first three are very difficult to do. The last is easy, but has a detrimental effect on profitability. To completely eliminate drawdowns one must either eliminate all losses or cease trading. The first is extremely difficult. It is better to simply develop or search for the best possible trading system, and trade it with the highest risk factor. Forget about the drawdowns. They are just part of the process of successful investing.

I am attaching a graph illustrating how a higher risk factor increases the performance of a trading system over 108 trades. This trading system has about a 75% W/L rate and 1:1 RRR. The losses are not clustered substantially. The graph illustrates how the higher the risk factor, the greater the profitability and the larger the drawdowns in the course of the trading program; greater drawdowns is the inevitable consequence of increasing the Risk Factor in a successful trading program. The trading program employing a 9% Risk Factor earns 25 times more than the trading program with a 3% Risk Factor, and the drawdowns are proportionately larger as well.
Attached Image
  • #8
  • Feb 26, 2007 2:53pm Feb 26, 2007 2:53pm
Quoting drayco
If i were to buy (enter) at the absolute bottom and hold to sell (exit) at the absolute top, there would be no drawdown at all. Then to sell (enter) at the absolute top and hold to buy (exit) at the absolute bottom yields no drawdown at all. Where is the drawdown on open equity?
I'll give you an example; If the bottom on the day is 1.3050 and the high is 1.3100 and you manage to buy the exact low (1.3050) and sell at the exact high (1.3100) you will still encounter a drawdown somewhere because the price doesn't move in a straight line. Price may go from 1.3050 to 1.3075 down to 1.3070 and then to 1.3100. As small as that correction was you still had a drawdown of 5 pips. On a higher timeframe these drawdowns may be much more than 5 pips. The only place price moves in a straight line, is on a tick chart - from say 1.3101 to 1.3102. Can't trade that, pay spreads and still be profitable.
  • #9
  • Feb 27, 2007 3:22am Feb 27, 2007 3:22am
Quoting itme
Drawdowns are the loss of capital during a trading program. If one looks at the trading program as an integrated whole, then drawdowns are not necessarily a bad thing. They are simply a part of a good trading system, just as stops, losses, and wins are part of a trading program.

The trader who has an independent aversion to drawdowns is being irrational. Let's consider, for example, a trading system with 75% wins and an average RRR of 1:1. This is an excellent trading system. It is extremely profitable. About 25% of the trades will still be losses, however. To minimize drawdowns, one must minimize the Risk Factor. The lowest drawdown will come from the lowest risk factor, which is 0%. To minimize drawdowns one should not trade at all. However, the trading system is successful. So to not trade is to forego profits. Therefore, the irrational aversion to drawdowns will result in the sacrifice of profits.

If one has a successful trading system, one should maximize drawdowns in order to maximize the profitability of the trading process, not minimize them. One should employ the maximum risk factor, which will produce the maximum return on investment. By employing the maximum risk factor that is possible, one will maximize both drawdowns and profits. However, the maximum drawdown within an acceptable probability of failure must still be less than 100% of capital, otherwise the trading program will fail. This is the only rational limitation on risk factor and drawdowns - avoidance of failure.

To reduce drawdowns one can only do four things - improve win rate, improve reward / risk ratio, decluster losses and reduce risk factor. The first three are very difficult to do. The last is easy, but has a detrimental effect on profitability. To completely eliminate drawdowns one must either eliminate all losses or cease trading. The first is extremely difficult. It is better to simply develop or search for the best possible trading system, and trade it with the highest risk factor. Forget about the drawdowns. They are just part of the process of successful investing.

I am attaching a graph illustrating how a higher risk factor increases the performance of a trading system over 108 trades. This trading system has about a 75% W/L rate and 1:1 RRR. The losses are not clustered substantially. The graph illustrates how the higher the risk factor, the greater the profitability and the larger the drawdowns in the course of the trading program; greater drawdowns is the inevitable consequence of increasing the Risk Factor in a successful trading program. The trading program employing a 9% Risk Factor earns 25 times more than the trading program with a 3% Risk Factor, and the drawdowns are proportionately larger as well.

That's what I pretty much meant, the backtested drawdown results of a system, not bottom or top picking like some are discussing here.

itme: Such a pretty uptrend on your graph - wish there would be such a profitable systems available
  • #10
  • Mar 1, 2007 3:14am Mar 1, 2007 3:14am
Quoting itme
Drawdowns are the loss of capital during a trading program. If one looks at the trading program as an integrated whole, then drawdowns are not necessarily a bad thing. They are simply a part of a good trading system, just as stops, losses, and wins are part of a trading program.

The trader who has an independent aversion to drawdowns is being irrational. Let's consider, for example, a trading system with 75% wins and an average RRR of 1:1. This is an excellent trading system. It is extremely profitable. About 25% of the trades will still be losses, however. To minimize drawdowns, one must minimize the Risk Factor. The lowest drawdown will come from the lowest risk factor, which is 0%. To minimize drawdowns one should not trade at all. However, the trading system is successful. So to not trade is to forego profits. Therefore, the irrational aversion to drawdowns will result in the sacrifice of profits.

If one has a successful trading system, one should maximize drawdowns in order to maximize the profitability of the trading process, not minimize them. One should employ the maximum risk factor, which will produce the maximum return on investment. By employing the maximum risk factor that is possible, one will maximize both drawdowns and profits. However, the maximum drawdown within an acceptable probability of failure must still be less than 100% of capital, otherwise the trading program will fail. This is the only rational limitation on risk factor and drawdowns - avoidance of failure.

To reduce drawdowns one can only do four things - improve win rate, improve reward / risk ratio, decluster losses and reduce risk factor. The first three are very difficult to do. The last is easy, but has a detrimental effect on profitability. To completely eliminate drawdowns one must either eliminate all losses or cease trading. The first is extremely difficult. It is better to simply develop or search for the best possible trading system, and trade it with the highest risk factor. Forget about the drawdowns. They are just part of the process of successful investing.

I am attaching a graph illustrating how a higher risk factor increases the performance of a trading system over 108 trades. This trading system has about a 75% W/L rate and 1:1 RRR. The losses are not clustered substantially. The graph illustrates how the higher the risk factor, the greater the profitability and the larger the drawdowns in the course of the trading program; greater drawdowns is the inevitable consequence of increasing the Risk Factor in a successful trading program. The trading program employing a 9% Risk Factor earns 25 times more than the trading program with a 3% Risk Factor, and the drawdowns are proportionately larger as well.
What exactly is the Risk Factor comprised of? How is it determined? Thanks
  • #11
  • Mar 1, 2007 3:24am Mar 1, 2007 3:24am
Quoting zamakhtar
What exactly is the Risk Factor comprised of? How is it determined? Thanks
I think I get it. 3% would be 30$, 6% would be $60 and 9% would be $90 for the first trade with $1000 capital. And this changes as the account grows. But risking 9% should only be done with a system that is actually at least 75% correct and has been proven to be for some time.

Thanks very insightful post.
  • #12
  • Last Post: Edited 8:01pm Mar 1, 2007 12:30pm | Edited 8:01pm
Quoting zamakhtar
I think I get it. 3% would be 30$, 6% would be $60 and 9% would be $90 for the first trade with $1000 capital. And this changes as the account grows. But risking 9% should only be done with a system that is actually at least 75% correct and has been proven to be for some time.

Thanks very insightful post.
Right, zamakhtar. Risk Factor is the percentage of your equity that you risk, in other words, that will be lost in the worst case scenario, such as hitting the stop. It is not the size of the margin, as some people mistakenly imagine.

You are also correct that determining the correct Risk Factor is only possible if you are analysing an objective system with known performance characteristics, which means that you will need to have a large number of trades to study, about 100 or more. There are both personal (lifestyle, psychological, risk tolerance, etc.) and objective aspects to deciding on the best Risk Factor for a particular trading program.
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