- 06/21/2017 at 5:37 pm #42797
I agree – very interesting article by Key Quant.
For me, Max Drawdown is a far more important measure of risk than volatility because it directly relates to the pain I would feel and whether I would stick with the strategy rather than bailing out at the wrong time. A 10% drawdown on a 500K portfolio equals a drawdown of 50K which I can tolerate, but a 20% drawdown equivalent to 100K I could not.
In the Portfolio Builder I always ran it to maximize CAGR and minimize MaxDD. However that is not easy to do in QuantTrader. You have to select a setting in the heatmap, select Apply and view the MaxDD in the Strategy Summary panel. This is extremely laborious as lower volatility does not always guarantee a lower MaxDD.
Could you introduce a parameter to the optimizer so that it would only display results for a drawdown of less than x%, or at least display the Draw/Range in the heatmap summary panel?06/21/2017 at 6:13 pm #42798
I have to disagree: max drawdown is very bad measure of risk since it’s one time event. You can’t measure risk, which is multidimensional by taking into account just one single point of time. Ulcer Index is much better, since it takes into account not only “depth” of drawdown but also “duration”, which is painful as well. You can sometimes even don’t know that your strategy had large drawdown if it was just a brief flash crash. But imagine if it’s 10% for many months…06/21/2017 at 9:43 pm #42799
I agree to both.
For me drawdown (and time to recovery, or duration) also is a very important soft KPI when looking at an equity line, and trying to figure out if my stomach can handle it. Finally, for most investors, drawdown (not CAGR, Volatility or Sharpe) at the end is the killing factor which makes them (..us) abandom a strategy. I think these are the points in the line of Richard.
On the other hand, I also agree with reuptake. Drawdown, or Maximum Drawdown to be exact, is only describing a historical one-time event within the timeframe of the equity. So statistically it is a weak measure, how frequently is the equity “under water” overall, how long and sharp are the corrections? Was that Max Drawdown due to a specific reason with high or low probability to repeat in future? Ulcer index or MAR improves some of the deficiencies, but is also harder to be interpreted..
So at the end, DrawDown for me stays an important SOFT measure when manually looking at equity curves, but one needs to be aware of the short-comings when it is to statistically evaluate or compare strategies..
And just to throw a new one into the round: R2, or the Coefficient of determination (https://en.wikipedia.org/wiki/Coefficient_of_determination or http://www.morningstar.com/invglossary/r_squared_definition_what_is.aspx) is a measure I´m looking more and more at. In simple terms it explains in percentage terms how close an equity curve is to a straight line (on a logarithmic scale), something we´re finally looking for.
Tom addedd a new thread about this measure recently, and it may also serve as answer to a question by Joachim some weeks ago on how to measure how good a strategy is performaning after inception compared to the backtest: If the R2 after inception is lower than the R2 of the backtest, it is a sign of weakness, or even curve-fitting..
Maybe this is a way to go?
.. may the discussion continue..06/22/2017 at 4:33 am #42805
To be precise: I’m not against using drawdown, I’m just against using max drawdown. Ulcer Performance Index (UPI) is all about drawdown. BTW: why you think Ulcer Index is hard to be interpreted (comparing to modified Sharpe)?
I have to dig deeper in R2 (there are also other measurements) but I’m not sure if “a straight line (on a logarithmic scale),” is “something we´re finally looking for”. Maybe strategy will have other characteristic (grows faster then logarythmic?)
But there is another, more fundamental question regarding Logical Invest strategies. My understanding is that we’re trying to use momentum factor on other characteristics of strategy than pure profit. Let me explain what I mean.
Momentum means that what was profitable in the past tends to be profitable in the future (statistically). This phenomenon is well described, there’s ton of research on it, including research which tries to determine if it’s momentum is real and what causes this inefficiency.
But we’re here pushing it bit further, if I understand correctly. We’re adding risk to the mixture. When using mod Sharpe or UPI we’re not only saying that “what was profitable in the past tends to be profitable in the future” but “what had some good profit/risk ratio will have good profit/risk ratio in the future”. This is interesting hypothesis, but again: it’s still hypothesis.06/25/2017 at 4:13 pm #42890
I put simple test data into Excel that compounds at a consistent rate, and the scatter plot allows for an exponential curve to be fit to the line, and includes an R2 calculation. I had thought would only calculate for a straight line, but it looks like it can just as easily do it for a curve or even a polynomial. So, you wouldn’t need to use a logarithmic scale to plot your data, you can calculate R2 directly from “curved” data. Just thought it might be worth mentioning.06/29/2017 at 10:58 am #43002
Another very interesting article, this time about risk adjusted momentum. Lot of work done here: http://www.investresolve.com/blog/dynamic-asset-allocation-for-practitioners-part-3-risk-adjusted-momentum/06/30/2017 at 10:26 am #43043
This series of articles is one of my favourite, great stuff! Also make sure to read their “Adaptive Asset Allocation – a primer” whitepaper, excellent and I love these guys!!
We´ve replicated their strategies and get very close to the results they report, very trustworty and solid stuff. And their “Select Top X ETF based on Momentum and Volatility” is actually very close to our methodology in QuantTrader
… we leave it up to our valued followers to judge which is better :-) Public P-Contests are not our style, instead here just a Hip Hip Hurray to Adam Butler and gang!!04/16/2018 at 7:38 am #51612
I have an optimization question using QuantTrader. It is not clear to me what parameters are being optimized when I click on “optimize”. Obviously the lookback period, but what else? It seems to magically improve the CAGR but I am unable to replicate the changes manually so I don’t have any feel for whether the optimizations are real or just a very accurate backtracing tool.04/16/2018 at 9:02 am #51613
[quote quote=51612]I have an optimization question using QuantTrader. It is not clear to me what parameters are being optimized when I click on “optimize”.
Lookback period / Volatilty attenuator04/16/2018 at 9:35 am #51615
I have an optimization question using QuantTrader. It is not clear to me what parameters are being optimized when I click on “optimize”.
Lookback period / Volatilty attenuator
Thanks. So what is the value of the volatility attenuator if the field is blank? I had assumed zero.04/16/2018 at 1:12 pm #51619
The default value for the volatility attenuator is 1, e.g. if left blank the “modified sharpre ratio” we´re optimizing for becomes the standard sharpe ratio.
Here much more about the nuts and bolts involved, see especially video 3.5: https://logical-invest.com/video-tutorial-quanttrader-a-complete-walk-through-for-new-users/
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