Traders have long been concerned with the size a trading system's drawdown. This, of course, makes sense as all traders should be evaluating risk versus reward at all times.
The problem is that sometimes we as traders have too narrow of a focus. We will take some trading system metric and concentrate on it as if it were the sole determinant of a trading systems potential failure or success.
The amount of a trading system's Drawdown is one of those metrics that is focused on rather narrowly. Given the choice between a $10,000 drawdown and a $5,000 drawdown most traders would choose the trading system with the $5,000 drawdown. Why? The answer is simple, most of us would rather experience a $5,000 dip in equity rather than a $10,000 dip. This makes perfect sense.
But can a trading system with a larger drawdown actually be a “better” trading system? Well, “better” is a subjective word but consider this, all things being equal would you rather have a $10,000 drawdown that lasted 3 months or a $5,000 drawdown that lasted 3 years? You see the length of time a trading system stays in a drawdown is important as well.
If your trading sysytem stays in a drawdown for 3 years that's 3 years of time that you are not making a return on your investment. The amount of time a system takes from the moment it goes into a drawdown till the moment it comes out is called the drawdown recovery time.
Drawdown recovery time gives us another way to look at a trading systems drawdown.
The maximum drawdown recovery time is one way for us to look the longest amount of time our system was in a drawdown. Having an average of the drawdown recovery times gives us an even better look at a trading system's performance.
Leave a Reply