Maximum drawdown period9/10/2023 Also, generally your max draw down is not a function of your current wealth unless it is a local minimum or similar local minimum metric, according to standard market practice. Make sure you understand that going practice is that most draw down calculations apply a moving window which means your maximum draw down is a function of the local maximum within the observation window not a global maximum. Thus if you start out with 1 million xyz currency units and suffer a loss on the first trade of 100,000 xyz then you suffered a 10% draw down. Generally draw downs are measured on invested capital not raw pnl. Other assumptions may solve the problem, but arbitrarily different decisions for initial value will lead to different drawdown calculation results.Ī second thought about drawdowns regard their effectiveness do you think that simple variation calculation might give a better insight regarding the strategy's risk? And even then - how would you combine average profit and variance? And how would you calculate the variance - every trade? Every day? Around 0 or around the line connecting the final profit with 0 during the period? Or around the linear regression?Īnd if linear regression is involved - why variance and not, say, standard error? For backtesting purposes, I always assume the net value of the "robot" is 0, and from that point on it makes profits or losses. The problem arises when the first "peak" of the trading strategy is of value 0. The drawdown (at least according to Wikipedia), saves a peak's value, and for every value later which is lower than the value of the peak, calculated: I am trying to find an indication for risk, something like Sharpe ratio or Sterling ration for that, I thought of using the (maximum) drawdown measurement, but have encountered a problem. It could be an indicator of a sound investment.Īll things being equal, a fund or portfolio with a higher Calmar ratio is the preferred investment.I am developing a trading strategy for currencies. The Calmar ratio above 3.0 shows that the profit significantly exceeds the drawdown.This investment could be considered risky. The Calmar ratio of more than 1.0 shows that the profit slightly exceeds the drawdown.The Calmar ratio from 0 to 1.0 indicates that the portfolio's profit does not exceed the maximum drawdown for a given period.Values below zero do not convey any meaningful information. Negative Calmar ratio means the risk-free rate is higher than the portfolio's return.In that case, this means that for the selected period, the annualized return exceeds two times the maximum drawdown. The Calmar ratio is designed to help understand whether a higher return is associated with a higher risk or not.įor example, suppose the value of the Calmar ratio for a portfolio or fund is 2. And funds that show higher returns without taking on greater risks are considered to be better investments. When comparing investment funds or portfolios with each other, investors should consider both the profitability of the investment and the risks associated with it. It represents the largest drop in the price of an asset from its peak value over a certain period. The maximum drawdown for many investors is a more understandable measure of risk than the volatility (standard deviation) used to calculate the Sharpe ratio. The principal difference between the Calmar ratio and other Sharpe-like ratios is that it is calculated using the maximum drawdown as a risk measure. Together with Sharpe and Sortino ratios, it is one of the most popular indicators for evaluating the performance of investment funds and portfolios. The Calmar ratio is a measure of risk-adjusted returns. It is similar to the Sharpe ratio but uses the maximum drawdown as a measure of risk. Calmar Ratio is a metric that measures the risk-adjusted performance of a portfolio.
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