Basic Understanding of Maximum Drawdown

☆There is a maximum drawdown item in the backtest.

☆It is an important criterion when selecting an EA.

☆This time I will write about the maximum drawdown.

① In a simple interest backtest, percentages are not considered

② Being low is not necessarily good

③ The recovery factor is important

④ If possible, it should be displayed in yen

I will write an article about these four points like this.

About ①

In a simple interest backtest, of course, the lot size is fixed.

Unlike compounding, you trade with a fixed lot size regardless of how much margin there is.

…In other words, the more initial margin you have, the lower the maximum drawdown percentage in the backtest becomes.

Therefore, in a simple interest backtest, you should not look at the maximum drawdown percentage!

You must look at the amount instead. (Claims of a sacred EA with maximum drawdown under 1% are not reliable at all)

② About

And even if you look at the amount for a simple interest backtest, the maximum drawdown depends on how many lots you tested with.

If 0.1 lot yields 50,000 yen, then 0.01 lot yields 5,000 yen. You need to see the maximum drawdown amount corresponding to the number of lots used in the backtest. (Claims of a sacred EA with only 5,000 yen maximum drawdown are not reliable at all)

③ About

Now, suppose the maximum drawdown is 50,000 yen at 0.1 lot.

Is this EA a good EA?

That alone cannot be determined.

How much pure profit is important.

(1) Maximum drawdown 50,000 with net profit 500,000

(2) Maximum drawdown 50,000 with net profit 1,000,000

…In these two, I would certainly choose (2).

However, backtests of commercial EAs often have varying maximum drawdowns and net profits, making comparisons unclear!

…This is where the recovery factor comes in as an index.

The calculation is simple: net profit / maximum drawdown

The higher this value, the more excellent the EA.

▲ Generally, for a backtest of 10 years, you should aim for a recovery factor of 10 or more.

In this case, the recovery factor per year is 1, so if a maximum drawdown occurs, you can recover in one year.

If net profit is 1,000,000 yen over 10 years and maximum drawdown is 50,000 yen, the recovery factor is 20.

If net profit is 1,000,000 yen over 5 years and maximum drawdown is 50,000 yen, the recovery factor is also 20.

※ In other words, it depends on the backtest period. Therefore, when you derive the recovery factor, it may be necessary to convert it to annual terms or standardize the period.

However, compare only backtests of 10 years or more.

Even if 5 years are good, the next 5 years could be terrible.

Please treat 10 years or more as the standard.

④ About

Suppose the maximum drawdown in one EA's backtest is 50,000 yen.

And in another EA's backtest, it is 500 dollars.

Are these two max drawdowns the same amount?

What is 500 dollars in Japanese yen?

If 1 dollar = 100 yen, then 50,000 yen.

If the exchange rate was 125 yen per dollar in 2015, the maximum drawdown would be 62,500 yen.

If it was 75 yen per dollar in 2011, the maximum drawdown would be 37,500 yen.

Even with the same 500 dollars, it could be 62,500 yen or 37,500 yen,

which varies quite a bit!!

Even if the maximum drawdown is 500 dollars, we cannot know how many yen it is.

（Purchasers, please overwrite this part）