What's an acceptable max dd? Quarter of total profits, so that a system that returns 100% can have a 25% max dd? Is there any rule of thumb?
I've heard (although I'm sure some will disagree) that max drawdown could reasonably be half of return. So, if your system returns 20%, then a 10% max DD would be reasonable. I'm sure there is no real "right" answer to this, and it will probably depend on the nature of the system.
I can tell you this, it doesn't take much courage to trade a system with a projected max drawdown of 50%. But it takes more courage than most anybody has to keep trading that system when it is down 35%.
that's the trouble with traders. They think they're losing money. They don't realize they are making money and just in a drawdown.
we came to the conclusion that each strategy which does not have a hit ratio of 100% will go broke - it is just a question of time. Even when you are right 99 out of 100 trades, if you trade for ten thousand years, once this very unlikely streak will happen that kills you. So the whole thing comes down to a single number: expected length until bankruptcy. Sounds weird but has advantages, one of them being that the system with the higher maximum draw down is not necessarily that with the longer expected bankruptcy length. You could have one strategy experiencing 20% draw downs twice a year with the max at 25% or one which experienced once a severe hit of 30% but usually never looses more than 15%. Expected length to bankruptcy will be substantially lower for the second with the higher MDD. I personally think it all turns down to MAR ratio, Sharpe ratio, Sortino or any other Return:Risk figure. Generally I would not enter games that do not offer at the least the same amount on the upside which you must prepared to suffer on the downside. And I think it differs substantially with your trading horizon. A long term trend follower must accept draw downs of 20% in order to get 20%. A diversified day trader will be able to do much better. peace