MultiStage (v7) System Results - Part Five

(Note: I am reposting from an article done a few months ago. The numbers are updated and accurate for the v7 iteration.)

Drawdowns...

"Drawdown" is a dirty word in the world of trading. Yet, it's critical to understand in order to have some idea of risk expectancy. First, let's talk about what drawdown is, in the event you're not familiar with this term. Drawdown is used to measure dips in your equity curve. In other words, this is simply a measure from the peak of your account balance to the trough, in the event of a dip. If accounts never dipped (for example, a passbook savings account) there would be no drawdown, but that's not my reality in trading... so I measure it.

For simplicity, take a look at the following picture:

As you can see here, there was a peak, at the beginning of the orange arrow. Imagine if this was your account balance... you would experience a dip in your balance that lasted as long as the orange arrow, and went as deep as the blue arrow.

For this reason, it makes sense to look at drawdown from at

least two perspectives... length and depth. The length measures how long it takes to get back to and beyond your peak equity; while depth measures how far your account dipped at the lowest point.

Now, if it's not too painful, let's take a look at some real life numbers. This next chart is a multi-year picture of SPY. This is a reflection of the SP500, and a pretty good view of the stock market as a whole. If your money was all in SPY your account balance would track it closely. With that in mind...

let's see what the drawdown would look like right now.

As you can see, I've marked both the length and depth of the current drawdown. According to this chart, the peak of SPY was back in October of 2007, at about $156. The current price is about $124. The SPY has lost about 1/3 of it's value during that time... from peak until now; therefore, the depth of drawdown is about 33%. The length of drawdown can't yet be measured, as we still haven't reached the peak; but it's now beyond three years (in October 2010).

With a good understanding of what we are examining, I share the following drawdown information about the MultiStage v6 Trading System:

• Average drawdown was 2.6% and 5.1 days
• Median drawdown was 1.4% and 2 days
• 67% of drawdowns were 5 days or less
• 95% of drawdowns were 18 days or less
• Largest 5 drawdowns: 20.9%, 20.9%, 18.7%, 14.8%, 14.6%
• Longest 10 drawdowns: 54, 44, 43, 42, 34, 27, 27, 25, 23, 22 days

As with the previously posted results, these are the results from about a decade of backtesting. Actual results can and do vary a bit, but this gives me an idea of what has occurred in the past, and therefore what I might expect. No doubt, things can change, so I don't view this as the only set of possibilities, but it's a good framework. If I start experiencing things outside of this norm I will begin looking very closely at what has changed and how I might adapt.

Good Trading...