Drawdown metrics can be misleading when analysing system performance. Every investor wants to know what they can potentially lose or what a system has lost in the past, this way the investor has some expectation going forwards. This is a measure of risk and survivability, especially when you consider margins (futures are traded heavily on margin).
Drawdown percentage depends entirely on the starting capital. Most systems backtest reports are run with the assumption of starting $100k capital trading 1 contract with no compounding of returns. However, some developers will then inform investors that the system can be run with as little as $10k and still have the same performance.
Let’s assume the backtest report stated a 10% drawdown on $100k right of the start of trading = $10k drawdown.
Traders starting this with $35k the dollar value drawdown will be -$8211 trading 1 futures contract. Percentage drawdown is 23.46%.
Futures are traded only in 1 contract increments. Markets move in percentages and price has risen remarkably over the last decade. It is better to normalise the trade data to the current market price to get a more accurate figure for a trades expected dollar value.
After adjusting and normalising the data for historical trades we achieve expected dollar performance at today’s market prices. The same trades would be made but after adjusting for a much higher current market price we get greater dollar values per trade.
Process normalising past trades to current market price
Each trades profit/loss dollar value will be converted to points for their respective markets e.g. $50 = 1 Point ES Market, $20 = 1 Point NQ, $5 = 1 Point YM
Convert points to a percentage at that current time and market price e.g NQ trade in March 2007 (market trading at 1763.75 price) with $175.98 profitable trade = 8.8 Nasdaq points = 0.5% market move.
The 0.5% move is now normalised to this year's market price, NQ trading at 7711, this now equates to a $769.37 dollar value.
The data tables show Chimera trades normalised to the current market price, this highlights that dollar drawdown on the tested period will be larger if normalised to the current market price. This is close to close drawdown so intraday dollar drawdown value will be higher.
Monte Carlo analysis will show drawdown values can be exceeded without impacting the statistical expectancy of the system. Users should trade a position size relative to the worst-case Monte Carlo analysis – this is currently $16,948 per contract.
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