There are some mental tricks within LTTF to understand MaxDD in a broader context.
First, MaxDD can be, but most often is not the same thing as drawdown against initial capital. I graph what I call ICapDD (initial capital drawdown), and the values, quantiles, and distribution are distinct from MaxDD, and always less or equal MaxDD. For example, while the prior MaxDD showed 3 in 4 (75%) chance of not seeing a drawdown greater than 42.3%, the ICapDD for the same system stood a 3 in 4 chance of not being greater than 34.5%.In fact, ICapDD can trail off nicely to 0%; the possibility of not ever seeing a drawdown against your initial stake. Hey, that's one piece of good news!
Second, MaxDD is always measured from peak. One trade-off from riding the trend as far as possible is giving the price enough room to expand or contract, which usually translates into giving back substantial profits. So, in LTTF most of MaxDD is the price of riding the trend.
Of course, life pretty much sucks when after the appropriate due dilligence you started trading a new system and it immediately goes into a tailspin. This is where Chris openned the thread.
I think there is another piece of analysis that can help plan and set expectations. I trade by looking for an edge and exploiting it. The edge is a statistical beast, not a certainty. The more I can understand about the nature of that edge, the better I can use it. So, the question is: how long does it take before I can expect the edge to work in my favor, and with what certainty? My action is to commit to that period without fail or hesitation. BTW: research on my current LTTF systems show the high-confidence period to be between 2 to 3 years!!! Better not have ADD!
Cheers,
Kevin
ps. For me, "without hesitation" needs to include pre-arranged staging and kill-switches. Where possible I backtest both with and without those policies in place.
