Jump to content

Drawdown simulation and trading systems selection


yash

Recommended Posts

Suppose i have a trading system A which has historical 100 trades data. I ran simulation 10,000 trials and look at the worst drawdown that this system A could have produced by chance alone. Let's say that

System A has max simulated Drawdown (DD) at -40%. Now if I set my maximum drawdown of my portfolio at -20%, i will be trading system A by only half of my portfolio to ensure that when the worst comes, i

won't be down more than -20%. By the same token, if system B has max simulated DD of -10%, i will be trading 200% of my portfolio on system B.

 

Questions:

Currently I set every system that i have equally at -20% max portfolio DD. Here's what i mean

 

System A B

Max Simulated DD -30% -63%

Portfolio Max allowable DD -20% -20%

Market exposure adjustment % 70% 33%

Annual Expected Returns 36% 24%

 

For example, if i have $100,000 portfolio, i will trade system A at 70,000 market exposue in a given trade. And i will trade only $33,000 worth of market exposure on system B. This also mean that my expected

returns will be geared down accordingly. So system A will now have expected returns to my portfolio of (36%*70%) = 25.2%. And system B will give me 7.9% returns to my portfolio.

 

Now here's my question, by setting each system max DD to -20% of the total portfolio, i am willingly allow each system an equal chance of damaging my portfolio. You would ask, why should i allow system B

which can generate only 7.9% returns to my total portfolio to have the same damaging effect on my portfolio. In other words, should i set B at -15% instead of -20%? How about setting A at -25%? What should

be my method in setting this Portfolio Maximum Allowable DD when i take into consideration the expected returns of each system?

 

Any comment is welcome.

 

Thank you

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

×
×
  • Create New...