Thanks for your comments.

"Your average max drawdown is about 16 times your average net profit". I suppose you're talking about APD here. I don't think APD is useful in general, but in some cases, which have been discussed in C2 forums, APD is useless. That is the case of a system like this which is equally exposed both long and short. Half the equity is in long trades and half in short trades every day. Hedging systems will have low APD. The true measure of any system is drawdown vs. return (as you allude to here), but from the equity curve, not the trade stats. In the case of BigCapTrader the annual return is about 4 times the max drawdown, that's a pretty good ratio.

The last time I discussed APD, Jules pointed out how he doubted the example I gave could be true in real trading. I said that good longer-term trend-following systems wiIl always have a higher APD than good shorter-term scalping systems because they are only exposed once per trend, and even though they can have huge open-equity giveback at the end, it doesn't show in the APD stat. Scalping systems on the other hand are in and out of the same trend many times with no open equity giveback cushion. I now offer a comparison using two of my own systems: Deviation Trader (a longer-term trend-following strategy), and Short-Term Trader (a shorter-term scalping strategy).
Deviation Tr. Short-Term Tr.
RETURN 72.6 78.1
APD .18 .09
MAX DD 25.5 16.96
SHARPE 1.35 1.849

The comparison shows that the returns are about the same, but the APD for the longer-term trend follower is twice that of Short-Term Trader. The true story is in the meaningful risk metrics, drawdown and Sharpe. Short Term trader is much better there. My own system metric is return/drawdown, gain-for-pain. Deviation Traders is 2.85, while Short-Term Traders is 4.60.

"This is little more than a random system". Don't know how that could be true. The system's made over 2100 trades. That's true statistical significance.

I don't remember that discussion, but I think you have a point with your distinction between long-term and short-term systems. I definitely agree that APD is not appropriate for hedging systems. Also, a Sharpe > 1 is not bad at all imho. The true question is how long you can keep it up.

Jules, here's a copy of the 7/19/07 post I was talking about.


There has been on-going discussion about systems with relatively low apd. In general they've been called "high risk". Even C2 uses apd exclusively (I think) in computing "low risk per trade" systems in The Grid. If you sort all the "low risk per trade" futures that come up in The Grid by apd, the lowest number is 0.32.

Though apd can highlight a certain type of problem with a system (adding on to losing positions, or holding on to same through huge open-equity draw-down) not all systems with relatively low apd have these problems.

apd discriminates against "scalping systems". Scalping systems risk draw-down at every entry to achieve a relatively low profit. Trend-following systems risk draw-down infrequently to achieve a relatively large profit. Consider a market that on five consecutive days opens at yesterday's close, goes down 10 points to a bottom for the day, then rallies to close 5 points above the open. If a scalping system went long on each open and closed the trade each close, it would make 5 trades, net 25 points, and have seen 10 points of drawdown each day. The apd each day would be 0.5 and the average across all 5 trades would also be 0.5. If a "trend-following" system got in at the open of the first day and held until the close of the last day, it too would net 25 points on the single trade, but it's apd would be 2.5 (25/10), 5 times higher than the scalping system. Yet these two systems had THE EXACT SAME MARKET EXPOSURE THROUGH THE 5 DAYS; they have an identical risk structure. The only difference is that the trend-folloing system suffered the 10 point drawdown each day out of profit.

I mentioned that I think C2 uses apd exclusively in determining "low risk per trade" system. Looking at the list of futures that comes up, the fifth-ranked system has an apd of 0.44 and an average loss of $16,000. That's a low-risk per trade system?

If second-by-second equity curves were available, apd would be unnecessary. All the faults of a system would be evident in the equity curve. It's when the equity curve granularity allows short-term systems to have huge drawdowns but recover without seeing the plunge that other metrics are needed. A famous fund manager in the 80s and 90s had a spectacular record of profits month after month, but he suddenly went debit during the Asian Contagian. Seems he was a counter-trend trader who kept adding on to losing positions until they turned his way. None of the daily details ever got reported, just the monthly.

In my opinion, the vast majority of systems fall into one of two categories: scalping strategies, and trend-following strategies. It's difficult to compare performance between the two because scalpers generally have a relatively high winning percentage, a relatively low profit-per-trade, and a relatively high frequency of trading, while trend-followers have a relatively low winning percentage, a relatively high profit-per trade, and a relatively low trading frequency. The only easy way to compare is to inspect their respective equity curves and equity curve metrics. Since it is impossible to build second-by-second equity curves across systems that make 1,000s of trades per year, other metrics are needed, and apd is a good one as long as it isn't taken too far.

Last thought. Scalping systems are being judged by a metric that discriminates against them, yet the biggest wort of trend-following systems (open equity giveback: you make a trading profit high of $3,000, but "give back" $2,000 in profit to exit with a $1,000 profit) isn't specifically addressed by any C2 metric. Open equity giveback should be added to C2 as a system metric in the same way apd is.

I don't know what my doubts were at that time, but today this looks like a sound analysis to me.

Keith:

I just want to thank you and compliment you for your very astute analysis.

I will look into adding some kind of "open equity giveback" metric ... and will also examine some of the other observations you made about the current limitations of C2's analysis. I have to agree that too often we're applying the same lens to multiple types of trading systems.

Matthew

"I don't think APD is useful in general"

That is a wildly stupid statement for trading in general. Low APDs for (non-spread) is a very good indicator of Hold&Hope or Averaging down, which is rampant on C2. Many vendors run up large max DDs, because they refuse to take a loss, in trying to keep their equity curve or win% attractive. This makes me question your claim as an industry professional

but in some cases, which have been discussed in C2 forums, APD is useless. That is the case of a system like this which is equally exposed both long and short. Half the equity is in long trades and half in short trades every day. Hedging systems will have low APD.

This is likely quite correct. You might want to address that in your long description, and mention in your short description that you seek to factor out market risk by balancing long & short positions.

""This is little more than a random system". Don't know how that could be true. The system's made over 2100 trades. That's true statistical significance. "

It is true if your APD is low for being just long or just short. But as you point out, being L/S hedged can be a unique circumstance . But being generally random is very true however, given the fact that you give back more than half your profits to commission (if C2 can be believed), and you have a profit factor of 1.1. This is a pitiful metric on your system. 2100 trades does not change this; statistical significance only demontrates that you have enough trades to potentially determine what your system does (its behavior), not prove that it works. You need really serious work to lift your profit factor and reduce your commission load.

Your attempting L/S balance is commendable, all the same. Many systems here implode when the market tanks, short term

"This is a wildly stupid statement for trading in general"

Get a grip man! Can't you make a point without trying to demean someone? The fact of the matter is that systems that average down are extremely easy to see on C2 without resorting to APD. Just look at the closed trades and see the number of times a trader added on to a position and look at the max drawdown of the postions. Those type of systems jump out. And there are plenty of systems that add on and have huge APD, until they crash.

"This makes me question your claim as an industry professional".

Unlike you (Mr. Investment banker, or is it writer? I can never remember), I've never made any personal claims on C2. In this regard I agree with you, let the systems do the talking.

"2100 trades does not change this; statistical significance only demonstrates that you have enough trades to potentially determine what your system does (its behavior), not prove that it works"

Agree with everything up to the "not prove that it works". The 2100 trades shows that the performance during that time frame was not luck. I'll bet most equity traders would have liked to make 4 times their max drawdown over that time frame. Going forward things can change, because the markets, especially the stock markets, are non-stationary over time. But the good news is that this strategy was weathered the current bearishness and volatility very well.

""Get a grip man! Can't you make a point without trying to demean someone? "

You are the one that needs to get a grip. How can you register as a CTA (a professional stature) and think it is not useful to compare the average max DD of a trade compared to its net profit? Have you EVER heard of Hold&Hope???? Or averaging down???? Where did you learn to trade?. As soon as I saw that, in my eyes, you dropped down to the category of "I have been trading for a few months and I think I have a profitable system."

"Unlike you (Mr. Investment banker, or is it writer? I can never remember), "

I work at IBs and am a writer/progammer. But I rarely say anything about either, unless a semi-clever dink occasionally tries to compare backgrounds.

"I've never made any personal claims on C2. "

I am registered with the CFTC as a publishing CTA. looks like a claim to me...

"the performance during that time frame was not luck."

Yes, it showed with statistical significance that that the performance was barely profitable, almost not tradeable. Profit Factor of 1.1, and over half that minimal profit was eaten up by comissions (not including system lease or slippage).

"Where did you learn to trade?"

I have live trading posted on this site, as do you. I leave it to others to decide who can trade and who can't.

"Looks like a claim to me"

No, it's a requirement.

no, it is not a requirement. Trading publishers do not need to be CTAs, as long as they do not offer indivudualized advice, manage OPM, etc. And associating yourself with the CTA moniker gives an air of trading mastery and presupposes a certain level of understanding. "Not seeing the use" of comparing avg trade max DD with avg trade net profit is really bad.

Yes, it's a requirement for a registered member like myself.

From the NFA regulations
"(1) Any Member or Associate who uses promotional material which includes a measurement or description of or makes any reference to hypothetical performance results which could have been achieved had a particular trading system of the Member or Associate been employed in the past must include in the promotional material the following disclaimer prescribed by NFA's Board of Directors: "

Trading and trading products is how I make my living. I have associations with brokers and registered firms that requires me to be registered. The NFA won't let them deal with non-members.

Now I'm going to do what over half the members of this site have done: turn you off.