Knowledge needed about drawdown
Drawdown includes floating losses which transpire during the life of any given trade, not just the realized losses. In other words drawdown is an account equity calculation not an account balance calc.
However drawdown is pretty much a useless metric for assessing risk or risk versus reward, see http://www.futuresmag.com/Issues/2009/August2009/Pages/Minimizing-your-risk-of-ruin.aspx
Drawdown includes floating losses which transpire during the life of any given trade, not just the realized losses. In other words drawdown is an account equity calculation not an account balance calc.
However drawdown is pretty much a useless metric for assessing risk or risk versus reward, see http://www.futuresmag.com/Issues/2009/August2009/Pages/Minimizing-your-risk-of-ruin.aspx
This stumps me because I am used to thinking that I should look at the maximal draw down for the percent and assume that this is the percent of my account balance representative of losses on the initial balance.
No... I'll borrow the explanation from the article "What the Numbers in the Expert Testing Report Mean" (https://www.mql5.com/en/articles/1486) with one minor correction - instead of balance we use equity to calculate DD (the article is old; at the time of it's writing the platform calculated DD using balance, but it has been changed to equity a long time ago):
Absolute drawdown is the difference between the initial deposit and the smalles value of equity within testing:
AbsoluteDrawDown = InitialDeposit - MinimalEquity
Maximal drawdown is the highest difference between one of local upper extremums of the equity graph and the following lower extremums:
MaximalDrawDown = Max of (Maximal Peak - next Minimal Peak)
The basic stages of changing the maximal drawdown value within testing are given in the picture below. The total maximal drawdown value is in the thick arrows.
- The maximal drawdown percentage shows the ratio between the maximal drawdown and the value of respective local upper extremum (of equity):
MaxDrawDown % = MaxDrawDown / its MaxPeak * 100%
And here is an explanation of relative DD (which was not calculated in the Report at the time of writing that article, so it's not mentioned in the article). I'll quote myself from another post (https://www.mql5.com/en/forum/123865):
The most important of these figures IMHO is relative DD percentage (%).
We seem to be forgetting a simple factor here. It would be my assymption that the tester is smart enough to calculate this into the estimate of production. That is swap costs. When trades are open across market opens/closes, the swap is either a fee or a bonus. In a demo or live trade scenario, it is reflected a part of the drawdown when trade is still open and is further calculated in as part of the loss when trades are closed.
We seem to be forgetting a simple factor here. It would be my assymption that the tester is smart enough to calculate this into the estimate of production. That is swap costs. When trades are open across market opens/closes, the swap is either a fee or a bonus. In a demo or live trade scenario, it is reflected a part of the drawdown when trade is still open and is further calculated in as part of the loss when trades are closed.
| Symbol | EURUSD (Euro vs US Dollar) | ||||
| Period | 30 Minutes (M30) 2001.01.01 07:00 - 2009.12.30 23:30 (2001.01.01 - 2009.12.31) | ||||
| Model | Every tick (the most precise method based on all available least timeframes) | ||||
| Parameters | FixedLotSize=0.10; | ||||
| Bars in test | 112703 | Ticks modelled | 32343703 | Modelling quality | n/a |
| Mismatched charts errors | 155 | ||||
| Initial deposit | 5,000.00 | ||||
| Total net profit | 30,718.37 | Gross profit | 30,993.02 | Gross loss | -274.66 |
| Profit factor | 112.84 | Expected payoff | 38.64 | ||
| Absolute drawdown | 79.00 | Maximal drawdown | 3328.27 (12.33%) | Relative drawdown | 19.32% (2498.29) |
| Total trades | 795 | Short positions (won %) | 330 (100.00%) | Long positions (won %) | 465 (98.28%) |
| Profit trades (% of total) | 787 (98.99%) | Loss trades (% of total) | 8 (1.01%) | ||
| Largest | profit trade | 75.00 | loss trade | -34.33 | |
| Average | profit trade | 39.38 | loss trade | -34.33 | |
| Maximum | consecutive wins (profit in money) | 465 (18368.31) | consecutive losses (loss in money) | 8 (-274.66) | |
| Maximal | consecutive profit (count of wins) | 18,368.31 (465) | consecutive loss (count of losses) | -274.66 (8) | |
| Average | consecutive wins | 394 | consecutive losses | 8 | |
Given so few positions closed for a loss but the account experienced nearly 20% relative drawdown the strategy must be running with very wide stops (or none at all) and I would expect the MAE versus P/L analysis to be rather telling.
https://www.mql5.com/en/articles/1492
https://www.mql5.com/en/articles/mt4/c/articles/2007/08/MAE_Distribution.gif
Given so few positions closed for a loss but the account experienced nearly 20% relative drawdown the strategy must be running with very wide stops (or none at all) and I would expect the MAE versus P/L analysis to be rather telling.
https://www.mql5.com/en/articles/1492
That is an excellent article. Thanks very much for highlighting it.
No... I'll borrow the explanation from the article "What the Numbers in the Expert Testing Report Mean" (https://www.mql5.com/en/articles/1486) with one minor correction - instead of balance we use equity to calculate DD (the article is old; at the time of it's writing the platform calculated DD using balance, but it has been changed to equity a long time ago):
And here is an explanation of relative DD (which was not calculated in the Report at the time of writing that article, so it's not mentioned in the article). I'll quote myself from another post (https://www.mql5.com/en/forum/123865):
The most important of these figures IMHO is relative DD percentage (%).
Hello,
I would prefer some clearer definitions of the different "drawdowns" DDs (equity instead of balance is correct):
1. DDs in $ are all DDs in the graphic with number1, 2, 3 and 4 (the DD with thick arrow), that means DD peak Equity / next minimum Equity
2. the MAXIMUM DD in $ of all DDs is the DD nr. 4 = max(all DDs in $)
3. a RELATIVE DD in % is a DD / DD peak Equity * 100
4. the RELATIVE MAXIMUM DD is the maximum DD / maximum DD peak Equity * 100, this is the value in (...%)
now be careful:
5. in the report: the relative DD in % is the maximum of all relative DDs in % = max(all rel. DDs in %), this expression should better named as MAXIMUM RELATIVE DD in %
6. in the report: the relative DD in $ is the max(all rel. DDs in $) = MAXIMUM RELATIVE DD in % * maximum DD peak Equity / 100, this is the value in (...)
In the description of the report the word "relative" is used for different meanings!
Sorry, please correct line 6.
6. in the report: the relative DD in $ is the MAXIMUM RELATIVE DD in % * this DD peak Equity / 100, this is the value in (...)
The maximum relative DD % is NOT the same as the relative maximum DD %, also for $ instead of %!
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With strategy tester I am trying to understand, that with drawdown if there are no losses then why is drawdown not zero? Check it out for yourself: