Acceptable drawdown amount?

Discussion in 'Automated Trading' started by Trankuility, Jan 3, 2011.

  1. Are there any guidelines as to what an acceptable and/or maximum drawdown level should be? Similar to how most people use 2% risk per trade.
  2. There is no right answer to this question, it is dependent on the person's risk tolerance, account size, etc. I consider 20% the maximum I would tolerate (and I have hit this in the past) but my goal is to stay under 10% and I have for some time now.
    lovethetrade likes this.

  3. A 20% drawdown requires a 25% recovery.
    A 25% drawdown requires a 33% recovery.
    33% requires a 50% recovery.
    50% requires 100%.

    This is why 20% is pretty much what most people will take as the 25% needed to recover is not to far off the 20% drawdown.

    At a constant 2% risk per trade you are looking at max drawdowns of over 20%, maybe even in the 33% to 50% range.
    lovethetrade likes this.
  4. heech


    I've been told a basic rule of thumb: you're doing well if max DD is less than half of annual compound returns.

    This is probably a somewhat conservative rule... in practice, having a one-time 25% dd doesn't necessarily imply you *must* have 50% annual returns to attract investors. But it's probably an appropriate rule of thumb for someone in their first 1-3 years of operation.
  5. i risk 5% / day with a max drawdown ever of 27% (sept 08-mar09) and in my best month ever i made 37% so that seems acceptable to me. i just say that if i suffer a 30% drawdown i'll reduce my size by 30% and if i suffer a further 30% drawdown (bringing me to 49% of original size) i'll lower my size to 50% of what it was originally. with every dvar (daily value at risk) i make i reset my dvar going forward to 5% of my new account size. that way i'm not suffering death-by-papercuts changing sizes over and over making winners smaller than they should be, but allowing winners to compound on themselves as aggressively as i deem reasonable. and as long as i return 14 dvar / yr i double my money. so i view it as a trade off of 14 dvar doubles my account, whereas a streak of losing 12 dvar cuts it in half.
  6. joe4422


    It entirely depends on what kind of trader you are. If you're a value investor, then draw downs don't even matter to begin with. The bigger the draw down, the better the buying opportunity.

    If you're a trader, then draw down should be something that doesn't happen to you. You're supposed to make money, not lose it. If you're losing, you need to stop because you'll probably continue to lose it.
  7. drawdown should be no more than half your best yearly performance

  8. So if you make 200% a year then 100% drawdowns are acceptable :p
  9. If you make 200% a year on a consistant basis for investors, you can have any drawdown you want :)
  10. Cool, thanks all for the info.
    #10     Jan 4, 2011