Forex drawdown formula
Let's say that I'm trying to evaluate a FX trading system. I know how to calculate the largest drawdown during a period of time, but how can I calculate the average drawdown or the average largest drawdown in the same period of time? First of all, I think I'll clear off some confusion in the formula. The Formula Ratio is a very simple investment portfolio measurement drawdown fits nicely to the topic of personal finance, although not so much to a foreign exchange trading system. The Sterling Ratio is mainly used in the context of hedge funds to measure its risk-reward ratio for long term investments. To do so, it has been adapted to the following in order to appear more like the Sharpe Ratio:. It's original definition, suggested by the company Deane Sterling Jones, is a little different and drawdown the one you should use if you want to measure your trading system's long term risk-reward ratio, which is as followed:. This one is very simple to calculate and the one to use if you want to measure any portfolio's long-term results, such an example of a 5 or 10 years period and calculate the average of each years largest drawdown. To answer Dheer's comment, this specific measurement can also be used in personal investments portfolio, which is considered a topic related to personal finance. Back to the first one, which answers your question. It's used in most cases in investment strategies, such as hedging, not trading systems. By hedging I mean that in these cases long term investments are made in anti-correlated securities to obtain a diversified portfolio with a very stable growth. This one is calculated normally annually because you rely on the Annual Risk-Free Rate. And this doesn't make sense in a trading system. If you have invested in 5 different securities where we calculated the Largest Draw-down for each, such as represented in the following array: I suggest in your case to only use the original Sterling Ratio to calculate your long-term risk-reward, in any other case I suggest looking at the Sharpe and Sortino ratios instead. Forex posting your answer, you agree to the privacy policy and terms of service. Sign up or log in to customize your list. Stack Drawdown Inbox Reputation and Badges. Questions Tags Users Badges Unanswered. Join them; it formula takes a minute: Here's how it works: Anybody can ask a question Anybody can answer The best answers are voted up and rise to the top. How to calculate average drawdown of a trading system? I thought about using the Sterling Ratio. Jose S 4. I don't know JoeTaxpayer. I appreciate the link, I'd never heard of this method before. Contextualization First of all, I think I'll clear off some confusion in the topic. To do so, it has forex adapted to the following in order to appear more like the Sharpe Ratio: I Suppose this is why you question the Average Largest Draw-down. I'll come back to that later. It's original definition, suggested by the company Deane Sterling Jones, is a little different and perhaps the one you should use if you want to measure your trading system's long term risk-reward ratio, which is as followed: Average Annual Draw-down has to be negative on the above-mentioned formula. Answer to Your Question: The higher the rate better is the risk-reward ratio of your portfolio. CMPSoares 2 I had to recently study all this I'm working on a platform for developing trading algorithms so I need to know all this as the palm of my hand. You should edit your question for qualitative purposes because you don't specify that you want to use the Forex Ratio which is only added to the drawdown. What topics are you referring to, JoseS, to be more precise? I read a lot on the internet, google scholar to be accurate, some on MOOC courses, like coursera, financial websites. And am planning to study finance alongside my Computer Engineering course. Sign up or log in StackExchange. Sign up using Facebook. Sign up using Email and Password. Post as a guest Name. What does 'average formula mean, exactly? MathOverflow Mathematics Cross Validated stats Theoretical Computer Science Physics Chemistry Biology Computer Science Philosophy more 3. Forex Stack Exchange Stack Apps Area 51 Stack Overflow Talent.
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