“The Underwater Equity curve, popularized by Jack Schwager, presents a trader with a unique way of evaluating equity performance. Using this graph, the trader can view the relationship between time and magnitude of drawdown as they relate to new equity highs. This graph enables the trader to look at the performance from a pessimistic viewpoint pinpointing how much drawdown occurred and how long it took to rebound to hit a new equity high.”
Rolling returns are used to look at the returns of any system for the holding periods similar to those actually experienced by investors because it breaks a performance period into many smaller, overlapping periods, kind of like slowing a movie down to study it frame by frame.
What to do when we get filled at daily lows (or daily highs if shorting)? This is a very good “problem” to have but we still need to make sure we’re being fair to all members.
Learning to live through a drawdown is probably the hardest thing you will ever do as a trader. Here are 5 points to help you through them.
You need to trade it as if you were the algorithm, not as if you were a trader. Does the algorithm take heed of the news? Does the algorithm worry about economic events that take place during the day? Does the algorithm watch price action during the day? NO it does not!