Worst Drawdown?

Discussion in 'Strategy Development' started by feng456, Jun 9, 2011.

  1. feng456

    feng456

    Hi guys I am seeking your opinions on how to plan for worst scenario in regards to losses.

    Say I backtested my system and the worst drawdown during that period was -$1000 (per quarter). Assuming my testing to be correct and results valid, what kind of drawdown should I plan for when actually live trading?

    p.s. I dont consider events such as the flash crash as valid seeing how they are too infrequent. I am looking for reasonable protection not protection against every possible thing.

    Thanks in advance.
     
  2. Did a search for “worst case scenario”, and then quickly scanned thread titles to look for anything I remember as being possibly relevant to your question.
    But my memory isn’t that good, so apologies if some/all of these are wide of the mark …

    http://www.elitetrader.com/vb/showthread.php?s=&threadid=218614&highlight=worst+case+scenario

    http://www.elitetrader.com/vb/showthread.php?s=&threadid=217800&highlight=worst+case+scenario

    http://www.elitetrader.com/vb/showthread.php?s=&threadid=212824&highlight=worst+case+scenario

    http://www.elitetrader.com/vb/showthread.php?s=&threadid=210848&highlight=worst+case+scenario
     
  3. feng456

    feng456

    Thanks. I am looking for personal experiences though. For example, your in experience how much drawdown would you plan for my given scenario?
     
  4. THINK IN PERCENTAGES.
     
  5. feng456

    feng456

    what i am asking is what kind of discrepancy should i expect in terms of drawdowns between real world results and theoretical backtesting
     
  6. Magic8

    Magic8

    In 08... you could have easily lost 50%, or more.

    There is no correlation, zero, zip, between "real world" and theoretical backtesting. Markets have no memory and cannot be predicted.

    Only false reassurances.
     
  7. I think this will be highly dependent on your trading style and how important trade execution is to your strategy. Are you a scalper/short-term trader or trading on a higher time frame?

    In engineering, there is a term called a "design factor" which is a fudge factor that allows you to account for uncertainty. Typical values are 1.5 to 4, depending on how critical the "thing" is.

    In this case, your analysis has shown -1000 is your estimate, so if you use a factor of 2-4, this should at least keep you in the realm of reason.
     
  8. feng456

    feng456

    thanks thats what im basically lookin for