“improved” system, a maximum drawdown of $30,000 might have taken place
right off the bat, depleting the capital by 30 percent (30,000 / 100,000), leaving
you with $70,000.
Now, I don’t know about you, but I would rather have a 20 percent drawdown
leaving me with $240,000, than a 30 percent drawdown leaving me with $70,000.
Hence, everything else aside, the first unimproved system is better than the sec-
ond improved one, no matter if the end result for the second system was higher
than $240,000. To measure the drawdown in relation to the equity, it might be a
good idea to put together a so-called underwater equity chartlike that in Figure
5.1, which shows that the maximum historical drawdown for this particular system
is approximately 5 percent.Drawdown Compared to the Market
Comparing the drawdown to the equity leading into it only addresses a small part
of the problem. Another important aspect to consider is the level at which the mar-
ket traded at the time. It should come as no surprise by now that the higher the dol-
lar value of the market, the wider its price swings will be, also measured in dollars.
In that case, a low drawdown, taking place when the market is at a high level,
is preferred over a high drawdown with the market trading at a low level. However,CHAPTER 5 Drawdown and Losses 59
FIGURE 5.1
Underwater equity chart.