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Need to know if a signal has or has not a hard limit to DD

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  • Dom
    Thanks RogerM.

    There is a tonne of areas I can and will most likely end up touching on in the coming weeks. There is a lot to divulge but for those who are interested, it'll only maximize your (generally speaking) returns and potentially mitigate the risk (or at least stack more odds in the copiers favour).

    There is a lot of uninformed copiers wildly allocating money and then kicking and screaming when they haven't turned their "investment" into a small fortune (most of the time through faults of their own, but sometimes because of other reasons - example topic I've started to touch briefly on already: Basic Diversification).

    We'll see. Depends on how much time I have spare
    Last edited by Dom; 10-27-2014, 09:23 AM.

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  • RogerM
    Interesting work FTB and an engaging video. Thanks.

    I would be curious to see a similar analysis applied to the systems on here.

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  • Dom
    Hi BMM.

    You ask a great and important question being a potential copier.

    There are ways in which you can gauge what a given traders future equity curve may or may not look like based upon the traders basic 'metrics'. For a basic analysis, some of these metrics comprise of the following:
    • Strike Rate(%)
    • Profit Ratio (Average Win($) / Average Loss($))
    • Average risk per trade(%)
    • Percentage the end up in break even (approx.)
    • Number of probable trades per year(sample)

    Keeping this post light and simple, knowing these bits of information you (generally speaking) can then run what is known as a "monte-carlo simulation". There are simple (excel) and complex (MATLAB) methods in doing this, of which have their advantages and disadvantages. In a nut-shell, it indicates to the copier not only what the future probable returns, and what it can look like, but also what the future probable drawdown limits are likely to be (assuming the trader remains constantly disciplined to his/her approach).

    Obviously this type of analysis is not simple to do or build in excel (basic-ish method). With that said, here is an example of what I am talking about in the video I have produced:- Basic Monte Carlo Spreadsheet.

    This is a relatively simple and fun way of understanding probabilities in trading. It's by no means a scientific way of doing it, but the point I am making is, you (which you clearly are) should always keep in mind how traders derive their draw-down limits and ask yourself whether or not that it's probabilistically sound what they're saying. Else, when drawdown comes around, if the trader has plucked a number out of thin air, you will really start to feel the heat!

    I carry out this type of analysis on my trading and publish the information on my site for prospective copiers (eventually). Click here for more information and look under "Basic System Metrics".

    Maybe I will eventually create a thread with the analysis on the traders listed on this site. I think a lot of people will be surprised in some cases.

    We'll see though!

    Hope this helps provide some food for thought for the time being though.
    Last edited by Dom; 10-26-2014, 05:30 PM.

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  • Need to know if a signal has or has not a hard limit to DD

    Hi simpletrader team,

    I already posted this on the main dayfox thread but it was quickly lost in the flood of posts of last days therefore I write here too

    Knowing if a signal has or has not a hard limit to DD is a definitely critical information to calibrate own risk multiplier. We read many times that declared max accepted DD was lower than the actual one etc etc etc

    My proposal to Nick is to give us a new info when presenting a new trader telling us if the max DD is or not is a HARD limit of the master trader

    Knowing that 25% DD is an HARD limit could permit to take responsabiliy a known risk taking the decision to trade at RF 3 or even 4 ( risking a margin call )knowing to trade at very high risk but still not gambling because we known what we do. No complain will be accepted in case of margin call with RF 4 or higher

    Knowing that 25% is NOT an HARD limit would change a lot the situation and mirroring at high RF will be gambling because risk is just very high but not estimated. Mirorring even at RF 1.5 will be taking unknown risk and it has to be considered gambling

    please evaluate to give this additional info