![]() Root mean square (RMS) of all drawdown values. Standard Deviation on Wikipedia Ulcer Index The result is somewhat “abstract” though because it does not relate directly to the experienced behaviour of a trading system. The good thing about SD is that it takes all values into account, it results in a stable measure. Unfortunated trading returns are not normally distributed and strictly speaking a SD of such values is not defined. Standard Deviation (SD) is a well established measure in statistics, it is defined and works well for normally distributed values. With 5 years of data you expect to see a P80 drawdown, with 10 years of data a P90 drawdown and so forth.ĭrawdown on Wikipedia Std.Deviation of Returns Usually future drwawdowns are worse than past drawdowns.įurthermore the drawdown observed depends on the length of your backtest/simulation/data series. drawdown depends on such a small set of numbers it also does not tell us much about the future. If you remove a single symbol from your portfolio or change the parameters of your strategy ever so slightly a big change in max. drawdown depends on the exact sequence of a small number of trades. It tells us something about the exact history of a system’s equity curve. Maximum drawdown is easy to calculate precisely. Other than with profits it is not very clear how the “riskiness” of a strategy can be quantified. Risk is the “downside” of a trading strategy. Also known as Compound Average Growth Rate (CAGR) expressed as a percentage (CAGR%) or as average annual total return (geometric) This is the profit of a trading strategy, expressed as a percentage and annualized. It is important to have a measure independent from starting capital and length of history curve however, so some scaling is used. It is relatively easy to measure the “upside” of a trading strategy. Such a measure can easily be applied to a benchmark or an index. All measures on this page work form an equity curve, the daily, weekly or monthly values of total account value. We consider here only those measures which don’t need any knowledge about the underlying trading strategy, such as individual trades or positions. There exist many measures which try to estimate the benefits or quality of a trading strategy. It also sets a reference frame for our new performance measure called SysQ (System Quality). This review of existing performance measures tries to show how the various existing performance measures deal with these effects. These hidden risks are related to probability distributions with “fat tails”, serial correlation, positive feedback loops and other signs of nonliear behaviour of complex systems. In autumn of 2008 it became clear that the “hidden risks” which Taleb and others talk about since years are much more then academic rumblings: These risks are a reality and they can impact the real world severely. ![]()
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