hole—and then gave back $1,500 of the open profit, your total equity drawdown
would now be $1,500 (day 4).
If you look closely at these numbers, they consist of three different types of
drawdowns. At day 0, we are dealing with the ETD, that tells us how much of the
open profit we had to give back before we were allowed to exit a specific trade. At
day 1, we are looking at the CTD that measures the distance between the entry and
exit points without taking into consideration what is going on within the trade. At
day 2, we are dealing with the STD, that measures how much the trade went
against us after the entry and before it started to go our way. And at day 4, we again
have the ETD.
Of course, we would like to keep all these drawdown numbers as small as
possible, but when only examining the overall drawdown number (the TED) and
blindly trying to do something about it, there is no way of knowing what it is we’re
really doing and what is actually changing within the system when we’re making
any changes to the input parameters.
To be sure, in recent years a few system developers and market analysts have
addressed this issue in various ways, but as far as I know, nobody has really nailed64 PART 1 How to Evaluate a System
FIGURE 5.2
Total equity drawdown (TED) and subcategories.