Monday, August 30, 2010

Asessing Drawdowns using Trade Timer at

In a recent article on (link) , Donald W. Pendergast, Jr. of talks about the effect that drawdown’s can have on undisciplined traders. First let me define what I mean by Drawdown. Drawdown is a key measure of track record quality and strategy “riskiness, which measures the decline in net asset value from the historic high point. I’m going to show you how Trade timer at can help you assess drawdown risk. In turn help you becoming a more disciplined trader.

Step 1. Click on trade timer in the tools banner at
Step 2. Select the date range to which you want to assess the drawdown risk.
Step 3. Select the list of Stocks (or Forex pairs/indices etc) you want to use. I will use the default Zignals list.

Step 4. Select your trade exit conditions.( For info on how to use these ,see PART 2 of

Step 5 – Select your Entry rule – Either choose from the list or create your own rule.For this I decided to create my own rule, when the 15 period Exponential Moving average crosses the 50 period Exponential Moving average .
Step 6. -Click create and select the paramaters for you new rule and click save.

Your will now see a summary screen of your new strategy . Here you can then see the returns, Risk/reward and DrawDown % of your strategy versus a buy and hold strategy and a buy and stop strategy.

You can then click on individual stocks in your list to see individaul returns, risk reward and Drawdown and you can alse see where your system entered (green arrows) and exited trades (red arrows).
So Based on my system I know in the past 5 years my system would have had a maximum Drawdown of 15.86%(With a loss of .8%!). Armed with this Historical drawdown information I can make better trading decisions and if my account drops 10% I can be sure that its well within normal limits.
Artices on drawdowns

Drawdowns: Steps to Take When You Find Yourself in a Hole


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