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What size of the maximum drawdown is acceptable by you for the real work of robots? You can specify a percentage of the current amount in the account.

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Started by JohnLast 3281 days ago

How much drowdown am I going to accept?
And there are plenty of materials over internet that are giving wize answers to that question. Even here there are many possible answers.
(the DD shouldn't be higher than say 5-8%) or (ratio of 1: 2.5 return/drawdown is OK for trend following trading systems).

The drowdown is related with the type of system you are working with. Trend following strategies are well known with their deeper drowdown. But You can't really avoid it because you never know when the big movement is coming and you have to endure the drowdown.

On the other hand other systems are trying to somewhat hide the drowdown by using a high percentage of winning trades and a rare event that will cause the big drowdown that may remain invisible on the time horizon you are making the tests. (If you know about social trading this is what works to attract followers)

I think that the key is in the correct modeling of the trading system performance. There are different risk appetites, different tastes.

The real question however is:

How do you know that your system is not working anymore.

The drowdown being a key component of the system parameters it is normal that you will endure a drowdown. But there are levels at which the drowdown is not normal anymore, and the drowdown is releasing an important message that your system is broken, that the market conditions you relied on are no longer there and you should stop it.

This is the critical drowdown.

From there you need to adjust the position sizing and the overall risk of your system according to your acceptable personal drowdown.

The acceptable personal drowdown need to match the system specific critical drowdown.
Ideally the personnal acceptible drowdown would be higher than the system critical drowdown.

If you fail to make this you will get out of the market while your system is still theoretically performing well.

According to Urban Jaeckle and Emilio Tomasini it is unacceptable to have a drowdown lower than the average profit per year.

A possible answer to that question what is the system critical drowdown are the Monte Carlo simulations:

Check a very simple article explaining this.