Trading is about time and money. Combining these two figures into one drawdown indicator gives you a visualization of these two key factors.
Trading strategies experience drawdowns from time to time. This is nothing you can avoid. You only can make sure to adjust the trading strategy if the current drawdown exceeds the historic one.
So, one key number will be how near your current peak-to-trough decline is to compared its historic maximum.
Days to Recovery
The next key number is for how long your strategy has been in a drawdown. By observing the average time spent in a drawdown in history, you can get an idea on when to expect a recovery of your strategy; or a failure if the recovery is not to come.
Visualization of Drawdowns and Days to Recovery
The given indicator combines these two numbers – drawdown and days to recovery – into one indicator. Look at the chart below to get an idea on how to read this indicator.
The chart shows the equity of a trading strategy and the indicator in a sub chart below. The height of the wedge represents the number of bars the strategy has been in a drawdown. If there is a new equity high, the indicator is reset to 0 (zero). Otherwise it counts the days since the last new equity high.
The colour of the indicator represents the magnitude of the current drawdown. If the indicator is green, the current peak-to-trough decline is less than the historic one. If it turns red, the strategy is experiencing a peak-to-trough decline bigger than any one in its history. Combining time and magnitude of drawdowns in one indicator gives you an appealing visualization of danger. It either is time or money.
Tradesignal® is a registered trademark of Tradesignal GmbH. Unauthorized use or misuse is strictly prohibited. Data by TeleTrader.