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Does DD really indicate the performance of a trader?

danderian
Oct 26 2014 at 08:10
5 posts
I know most of us really like to keep our stats pretty: not just for ego, but also to see how well we're performing. I am one of those people. However, as soon as I started using Myfxbook, I realized that one of the common indicators, the Drawdown (DD), is not properly interpreted by most of us. I've read here in the forums many people arguing that 'you're a bad trader if you're DD is high' and so on; it's not that I want to excuse myself - I've like 99% DD - but, in my case, that number was caused during the Scottish referendum when a lot of volatility affected the GBP pairs. At that time, I had to cut my profits to stay in the game, but I kept my initial capital untouched - or at least, the 90% of it -. So, the DD was calculated over the 'free money', my profit, but my capital was there and just few days after the fall, I could restore and almost duplicate my deposit.

So, I think in my case, I would interpret DD as the result of a - not happy - tactic to keep trading. Like a sacrifice, but it worth it.

What do you think? Does DD really indicate the performance of a trader?

kflallan
Oct 26 2014 at 10:00
5 posts
Correct me if I'm wrong.
99% DD is indicating that at a particular moment, your equity only left 1%, is that right?
In that case, I can only assume that this is ' dangerous'? thx.

Hendra Lau
hlau
Oct 26 2014 at 15:17
23 posts
Yes, DD is calculated from your equity, not from profit. For example, you start with $10,000 and you make (realize) a profit $5000, so your equity now is $15,000.

Now if next time, it shows DD is 99%, this means your current equity is $150, and your floating loss is $14,850. DD at 99% is not calculated from $5000 profit, it's always from equity.

danderian
Oct 27 2014 at 07:57
5 posts
Thanks for joining.

I understand what you both @kflallan @hlau are trying to explain, however in my experience, I'm not trying to put in the balance if a particular DD is good or bad: we all know the answer. My point is, that , if I look at my balance - not just my equity - I conclude that, when my DD has fallen significantly, my balance was still positive, holding around my initial capital's level.

Do you know what I mean? Please look at the graph produced by Metatrader:



As you can see in the above picture, the significant DD happened between 215-230, but it didn't went lower than a certain level, thus letting me hold on a bit and recover the loss later.

Attachments:


danderian
Oct 27 2014 at 07:57
5 posts
kflallan
Oct 27 2014 at 07:59
5 posts
hlau posted:
Yes, DD is calculated from your equity, not from profit. For example, you start with $10,000 and you make (realize) a profit $5000, so your equity now is $15,000.

Now if next time, it shows DD is 99%, this means your current equity is $150, and your floating loss is $14,850. DD at 99% is not calculated from $5000 profit, it's always from equity.


I think u have the key word 'floating loss'

BoneTrader
Oct 27 2014 at 09:52
35 posts
danderian posted:
Thanks for joining.

I understand what you both @kflallan @hlau are trying to explain, however in my experience, I'm not trying to put in the balance if a particular DD is good or bad: we all know the answer. My point is, that , if I look at my balance - not just my equity - I conclude that, when my DD has fallen significantly, my balance was still positive, holding around my initial capital's level.


Consider your trading period as something without start and end. Or something which starts when you open the position, and ends when you close it. Each trade is the first one and the last one. What if you were withdrawing your deposit after each trade and depositing it again? That is the main point in understanding DD - your deposit is initial before every trade u go.

You might be lucky and double your deposit in some period of time, and then you lose all the profit. You might say that still you didn't lose anything, as you keep your initial deposit safe. But what if you were not that lucky and your losing trade was the first one, then you would have lost half of your money and get 50% DD.

You never know when you open your worst trade, so drawdown is an absolute value always applied to your current balance and equity values.

¡ŋ ђθς ş¡ģŋθ ұ¡ŋςəş /
platin
Oct 29 2014 at 08:23
29 posts
Hello,

i use a more strict and profit orientated method for defining the term 'drawdonw'
I use Excel sheets ( Libre Office) to calculate the Drawdown.

At first the main difference is i set the Drawdown in Relation to the winnings and not to the initial Balance.
So with this method only the best results bother me.
I calculate per year. this means for example initial deposit 3000 USD win in Dollars/Pips = 1500, DD of Balance or Equity should
not go lower than 1/3 . So if the DD is more than 500 Pips, in my terms it is not a good Result.
Most people would see 1/2 also as 'good' because its still 50% of anual return. But my Reason to use this Rule to have a safety Zone to be prepared even for bad times (Black Swan Events)
I use mostly strategies with a DD of only 25% per year (calculated from the wins , not from initial Balance)

Exmple (0,1 Lot EurUSD 1 pip = 1 USD)


Here is the Formula

Winnings 1500

platin
Oct 29 2014 at 08:23
29 posts
sorry some error psoted before i was ready with my text xD, i cant edit it.
So here is the rest:

Exmple (0,1 Lot EurUSD 1 pip = 1 USD)

Initial Balance 3000(USD)
Winnings: 1500(USD)
Trades: 251
Timewindow 2012-2013 (1 Year)



Here is the Formula

My Drawdown Formula:
1/Winnings *DrawDownMax


My Effeciency Factor:
(Winnings/Trades) / (DrawDownMax/Trades)

For This Example
My Drawdown is : 28,55%
My Effeciency Factor: 3,5

platin
Oct 29 2014 at 08:23
29 posts
ah damn here is the correction

My Drawdown Formula:
(1/Winnings) *DrawDownMax

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