FAQ | SUCCESS STORIES | ABOUT | SUPPORT | CONTACT US
join us on facebook, twitter, and linkedin

  • Future shock [is] the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time. Alvin Toffler

Drawdowns: Understand Why Drawdown Is Normal As a Trend Following Trader

(December 03, 2008)

Download the Adobe .pdf report.

Winton Capital offers clarity on drawdown in trading:

As a description of an aspect of historical performance, drawdown has one key positive attribute: it refers to a physical reality, and as such it is less abstract than concepts such as volatility. It represents the amount by which you are less well off than you were; or, put differently, it measures the magnitude of the loss an investor could have incurred by investing with the manager in the past. Managers are obliged to wear their worst historical drawdown like a scarlet letter for the rest of their lives. However, this number is less straightforwardly indicative of manager quality as is often assumed. The seeming solidity of the drawdown statistic dissipates under closer examination, due to a host of limitations which are rarely explored sufficiently when assessing its significance as a guide to the future performance of an investment.
The Pros and Cons of “Drawdown” as a Statistical Measure of Risk for Investments
By David Harding, Georgia Nakou & Ali Nejjar
Winton Capital Management

The first is that, all other things being equal, drawdowns will be greater the greater the frequency of the measurement interval. The maximum drawdown will be greater on a daily time series than on a weekly one, and weekly will be greater than monthly. Investments that are marked to market daily, such as managed futures, may thus appear at a disadvantage to less frequently valued investments (e.g. hedge funds).
The Pros and Cons of “Drawdown” as a Statistical Measure of Risk for Investments
By David Harding, Georgia Nakou & Ali Nejjar
Winton Capital Management

The second is that the maximum drawdown will be greater for a longer time series, so that managers with longer track records will tend to have deeper maximum drawdowns. This effect would have perverse consequences if the raw maximum drawdown were used to measure quality across the board, as, in general, managers that have survived longer have given evidence of professional competence through overcoming such adversities.
The Pros and Cons of “Drawdown” as a Statistical Measure of Risk for Investments
By David Harding, Georgia Nakou & Ali Nejjar
Winton Capital Management

In order to make drawdown a more informative statistic, we must correct for track record length, measurement interval and volatility; we must take account of the error as well as making sure that we understand the nature of the return generating process (i.e. that it is reasonably parametric). Though some analysts correct for some of these factors, the conventional cursory use of drawdown as a statistic fails most or all of these tests, making it worse than useless.
The Pros and Cons of “Drawdown” as a Statistical Measure of Risk for Investments
By David Harding, Georgia Nakou & Ali Nejjar
Winton Capital Management

NOTE: If you want to learn about trend following trading in general there is one definitive text: the bestselling classic "Trend Following: How Great Traders Make Millions in Up or Down Markets" by Michael Covel. If you want to learn about the most famous group of trained trend following traders, the Turtles and their teacher Richard Dennis, "The Complete TurtleTrader" by Michael Covel is the only complete biography (with all of the Turtle rules) available. If you want to learn trend following techniques and systems through advanced home study and or seminars click here.

Watch New Trading Film: Broke The New American Dream



About Michael Covel | Press

amazon.com

Complete TurtleTrader
Order now!

The Complete Turtle story. Legend, lessons & results.

amazon.com

Trend Following
Order now!

Now available: the new 2009 edition. Order online today.

Get started

If you would like to find articles by category simply choose from the list below.

Watch Videos From Michael Covel

View More

  • Intro to Michael Covel's documentary film "Broke: The New American Dream".

  • Trailer for Michael Covel's documentary film "Broke: The New American Dream".

  • Greed is good says Michael Covel.

  • Michael Covel talks about 2008 trend following performance.

More Details

TurtleTrader® Systems Trading Courses

Do you want to learn how +100% returns were made in 2008 across all types of markets? Do you want to learn the right buy and sell decisions to make potential millions? Michael Covel has assembled some of the most profitable trend following trading systems available. Here you will find full descriptions of the training, frequently asked questions and pricing options for all investors.

Broke: The New American Dream

The new documentary film directed by Michael Covel. Covel traveled 75,000 miles completing over 100 interviews ranging from Nobel Prize winners to single moms. Full cast.

Michael Covel's Books

All versions and translations of both of Michael Covel's books are available for immediate purchase.

About Michael Covel

Michael Covel is an author, director and entrepreneur who founded the internationally known website TurtleTrader® in 1996. Covel's first book was the bestselling "Trend Following" (FT Press, Apr. 04, Nov. 05, Feb. 07 & Feb. 09). His second book "The Complete TurtleTrader" (HarperCollins, Oct. 2007 & Feb. 09) is the definitive inside look at legendary trader Richard Dennis and his student traders "The Turtles". In 2009 Covel released "Broke: The New American Dream" a film documentary investigating the 2007-2009 market crisis and crash. Not afraid of a crowd or controversy, Covel is known for engaging and provocative speeches presented to audiences in Tokyo, Paris, Macau (China), Vienna (Austria), Hong Kong, Dallas, Miami and São Paulo (Brazil). He has been quoted and interviewed by likes of The Wall Street Journal, Barrons, New York Post, Globe and Mail and Bloomberg.

Purchase Questions

Call or Email or Facebook for fast response to all pre-purchase questions. Read the reviews of products and check out press coverage. Michael Covel's network can be found on Linkedin too. Covel's training is used by new traders, college students, and experienced traders across 71 countries.

Free Weekly Email Newsletter

Opt-in/Opt-out email update reaching over 15,000 readers.

Connect with Michael Covel on Linkedin, Facebook and Twitter | Email and Phone Contact