Sounds like you're trying to cherry-pick the start date... It might be more interesting to run the systems through a Monte Carlo simulator to see if that average DD is truly average or merely path dependent... I'd toss the systems showing wide variance in the results unless you like a lot of sleepless nights...
Not at all, we are just trying to beat the system using statistical data. All trading systems, even the highly profitable ones, go through 2 cycles: the making money cycle, and the losing money cycle. My idea is to risk real money only when we are deep enough in the losing money cycle (on paper of course). In other words, I strongly suspect that these 2 cycles are not random, and that after a losing cycle of a certain magnitude, the trading system will automatically "correct" itself and start making money again. But again, the trading system must be a winning system to begin with.
The statement "He knows the average and maximum drawdown of each system." can be problematic. It could be "He THINKS he knows the average and maximum drawdown of each system."
Have you heard the story of the guy who drowned in a river with an avg depth of 6 inches? "IF" if you have a profitable trade system, and that's a big "if" because no one really knows till after the fact, then you have to take ALL the trades. The worst thing you can do is cherry pick the trades. Let's try an example here: Let's just pick system one. It goes into it's "avg drawdown" of say 15% giving you the signal to get in it. What if "before that drawdown this system was up 75%? You missed out on that entire run "waiting" for this drawdown. The irony here, even though you are now entering at a 15% drawdown, you are actually paying up big time. Chances are, going forward, even with this drawdown, your system probably has far more to go to converge to it's long term avg return which let's say is 30% a year. The only way I know of to counter large drawdowns is to make sure you are there for the big runs. If you miss the runs, you are in a world of hurt. Also, there is an old saying we have in trading, your largest drawdown is always ahead of you. Regardless of how large of a drawdown you had in the past, your biggest one is always in the future.
Hello Maverick74 and thank you for your feedback. Yes you are right, if a trader has a profitable trading system, it is in his best interest to take ALL the trades, without exception. BUT... Let's suppose I have 10 profitable (and non-correlated) trading systems. To make things easier let's say each system has a 20% maximum drawdown. It is true that if I wait for a 20% drawdown before trading, I could miss a lot of mega winning trades in the process, you are absolutely correct. But on the other hand, my drawdown will now be reduced to almost zero in the overwhelming majority of cases! And if you can keep the drawdown to its minimum, you are bound to make 10 or 20 times more money in the long run! Why? Because now you can trade with maximum sizing position and leverage your position to the max, via pyramiding techniques for example. Remember, if the drawdown of a system is zero, then I can theoretically multiply my trading capital a hundred times on each trade in the Forex market (assuming a 100:1 broker leverage) and make trillions in no time. Sure, a 20% drawdown could turn into a 30%, or 40%, or 50% drawdown or even more but this will happen only 10 or 5% of the time, depending on the robustness of your system. And besides, if you start trading after a 20% drawdown and it turns into a 30% drawdown (more than the maximum drawdown in this example), you can always close your position and wait for a "recovery" (on paper) before repeating the whole process again. In other words we can use stops even with the drawdown itself.
You are still missing a big part of this. Let's say you have 10 systems. And the performance is the same on all for the sake of simplicity. Avg annual return of 30% and avg drawdown of 15%. Here is the problem. And let's even say that you NEVER exceed a 15% drawdown. Who is to say you only have one drawdown a year? That was never mentioned. What if your systems produce 5 drawdowns a year of 15%? Now, next issue. Say again that you are correct and none of your systems ever exceed a 15% drawdown and say also that now we introduce the idea that we know for a FACT that there will NEVER be more then one 15% drawdown a year. Has it occured to you that if you run all 10 systems, AFTER they had their obligatory 15% drawdown that it's conceivable that what if each of them all had a teeny tiny 3% drawdown each at all the same time. Now you've got yourself a 30% drawdown. And lastly, let's suppose that your systems each have a 15% drawdown in which you activate them one at a time, only the 15% drawdown is signaling that your edge that you had in the past is now gone. So now you are running 10 systems all with no edge and they were trying to warn you vis a vis the 15% drawdowns. At some pt the systems WILL stop working and when they do, the only warning system you have is the 15% drawdown in which you are taking to mean to go all in. These are some of the many concerns I would have. And believe me, there are many more.
Well, that's even better my friend, you will make 5 times 15% = 75% return on capital invested on each trade! Remember, if the system is currently in a 15% drawdown, it has to go to a 0% drawdown first (return to the previous equity high) to re-enter another 15% drawdown. First of all, the odds of getting a 15% drawdown on 10 non-correlated trading systems and at the same time are astronomical. Mathematically, this type of scenario is called an impossible event. But let's suppose that all 10 systems lost 15% from their previous equity high, what will happen now? Well, it's very simple, they will ALWAYS return to 0% drawdown sooner or later, because once again we are trading with systems with a positive mathematical expectation. And when they return to zero, I will collect 10 times 15% ROI. I said it many times in this forum and elsewhere and I will repeat it again : only losing systems lose their "edge" over time. A robust, fully backested trading system will continue to perform for decades, unless the market itself changes in a dramatic way. That scenario will never happen because the traders create the market. And traders are highly predictable human beings, they keep reacting the same way over and over and over again, creating well-known chart patterns and price action configurations that the astute trader can profit from on a daily basis. I will be glad to hear them all.
Might humbly suggest reading through user 'acrary' complete post history -- recall briefly reading in years past discussion about this topic. Believe there is a popular thread from this member on the front page left side bar. Also maybe search around a bit in the archives for trading the equity curve (believe it was something along those lines). Good luck.