Crazyskier wrote: ↑Thu May 02, 2019 3:34 pm
Excellent advice and preparation here.
Here’s step 2 - & this is where we kinda merge into that nasty discretion territory.
Let’s say we have a yr’s worth of data.
The strategy will pump out a max drawdown figure (assuming the strategy is +ve).
However, going into the future – intuitively - the max drawdown will not be the same again. Therefore, it makes sense to randomise the equity curve, & work out what the max drawdown
could have been, in the last yr.
(btw, as caveat, to me, this is modelling – but I know this is far different to what Peter does – I’m still confused lol!!! – cos this is all backtesting!).
But do this process enough times, & we’ll get a histogram of potential max drawdowns. & this is where it gets challenging to interpret
The real max drawdown was: -£11.99
But the
potential max drawdown (given identical data) was between: -£25 & -£28
Meaning in theory, the strategy
cannot be turned off until that -£30 is breached. It would be very unlucky, but the risk is there. Cos if that strategy gets turned off incorrectly – we lose all the recovery potential,
& that’s what keeps me disciplined.
When I’m suffering; I have got to hold out – I’ve gotta keep executing through the pain, through the 20 losses in a row (all in the same vigour) – because the 20 wins in a row will come, & some.
Hopefully
Lots of caveats, lots of assumptions there (i.e. having the ability to perform various backtests etc, have a love for spreadsheets etc) - & also, during any drawdown I’d be constantly trying to hack out/beg for objective improvements after market hours – reducing the max drawdown potential by finding new stuff