Annual profit to drawdown ratio

Discussion in 'Strategy Development' started by kubilai, Jun 11, 2008.

  1. kubilai


    What's a good rule-of-thumb to this ratio? I'm thinking anywhere above 5 is good enough...
  2. Vorpal


    If you are talking annualized % return to MAX drawdown, shoot, anything above 1 is pretty good in my book.

    If you are talking about more of an average, IE: the average of each year's return/max drawdown for the year, yes >4-5 sounds pretty good to me there.

    I am more of a longer term position trader, so my evaluation comes from that perspective. Shorter term, your view of a good system metric may vary.
  3. promagma


    Isn't that the Calmar Ratio?

    If you are a good high-frequency trader, yeah you should get 5 or better.

    If you trade like stock_trad3r, buy & hope, you will be lucky to get 1 ....
  4. promagma


    lol, this is Elite Trader, and my post is the 7th ever, to mention the calmar ratio.

    It is a great performance metric.
  5. vikana

    vikana Moderator

    In my experience, for long term systems:

    if you can get the average annual return divided by max DD greater than 1, you're doing well. This will have to be measured over a 10 year period or longer.
  6. kubilai


    Ah it is called the Calmar ratio. I don't know about you guys, but more and more it's the only reward : pain ratio that matters to me. I never thought of it depending on trading time frame, which makes sense.
  7. hausse


    The MAR is CAGR / Max Total Equity Drawdown.

    The Calmar ratio is based on month-end to month-end max DD using total equity data.

    From the various gain-to-pain ratios I prefer the MAR and the Sortino ratio, also called modified Sharpe ratio.
  8. Cutten


    Depends on the frequency. With daytrading the ratio will be ridiculously high, something like 50-1. With position trading anything above 2 is pretty good (20% annual return with 10% drawdown is world class performance. 30/10 puts you into Soros territory.)

    5:1 implied 25% returns with 5% max drawdown. If you can do that reliably on size, just set up a fund, you will become a billionaire in 7-10 years if you can keep it up.
  9. kubilai


    What about for a strategy with holding period in the 1-5 days range? Not on size, unfortunately, market is mostly efficient, after all...
  10. Cutten


    I'm not sure since I operate on intraday and longer-term timeframes.

    However, since trades with 1-5 days timeframe can be done on pretty large size, making liquidity basically a non-issue, then I'd say anything 2 or 3:1 or higher is very good.

    In the hedge fund world, a 1:1 ratio or better is considered very good. E.g. 20% returns, with 20% drawdowns from time to time. Most hedge funds in the 20-30% range do have those kinda drawdowns every few years or so, and it's only the outliers like Jim Simons or George Soros during his heyday who managed to get into the 2:1 or better range. Buffett's ratio must be not much more than 1, since he took a pretty big haircut in the 1973-74 bear market, I believe it was around 20-30%.
    #10     Jun 15, 2008