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Drawdown to Returns Strategy

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  • Drawdown to Returns Strategy

    Hello Traders
    Today i and a few fellow traders were discussing a new strategic way of using performance to gauge your drawdown appetite as another way of trading. It sounded like a good idea but still we haven't delved into it much so we hope we can have a discussion here with other traders to see what others think of it . Here it goes .

    We thought of making 100% return as the epitome of any trading account , more like the perfect gain for any trader , being able to double your account within a short time . Then the issue of draw down came in because for an aggressive way of trading with a target of making 100% , draw down is likely to increase . That is when one of us came with the idea that for every return you make you are entitled to only have a maximum draw down half of the performance . So for example , if you are up 10% on your account , you should only have a maximum of 5% drawdown or 6% maximum , anything more than that indicates a problem with your system and an indicator that you are likely to lose your account sooner or later .
    Another example , if you have made 40% return , you can scale up your draw down appetite to 20-25% maximum . If 80% drawdown , a draw down of 40%-45% and so on . Thus when reaching your 100% return goal , a draw down maximum of 60% will be good and will show your trading prowess .
    Do you think this is a good strategy ? Do you think the logic is any good ? Do you think it is a finer way of determining a trader's strategy and trading ability?
    Let's discuss and tell us what you think .

  • #2
    Well apparently upon further research we learn't that the product you get by dividing your annual percentage gain by the draw down is called the 'calmar' or calmar ratio used to analyze trading strategy performance etc. If you did know that , good for you , if not , look more into it .

    Thread may be deleted
    Last edited by Lord Benj; 10-10-2014, 07:21 PM.


    • #3
      This makes a lot of sense. Drawdown has the potential to blow your account.

      Why does it say last post this thread may be deleted????


      • #4
        I wrote that in case the moderator wanted to delete the thread as it had no discussion

        Yes , the call it the calmar and for example you have a 20% draw down but you've gained 80% , then you calmar is 4 . Anything above 2 is likely to show you a good overview of the trader and his strategy and risk management . So if you take a look at fx viper for example , he now has a calmar 4 showing how good his trading technique is and you have a higher chance of not losing your account and keep gaining over the long term .


        • #5
          Interesting. so does FX Books show the Calamar do you know?


          • #6
            Not at all . My fx book does some other calculations that i don't really get their importance yet . Except the sharpe ratio