Tuesday, June 28, 2011

Alligator Drawdown History

The new Alligator strategy has gone into a pronounced drawdown since the end of development. The question arises as to whether the strategy has failed in some fundamental way. It's normal for strategy to perform less well in out of sample data, and at some point you have to make a decision on whether to pause trading or continue in hopes it resumes normal performance. Part of this involves setting risk targets before you ever entered trading. You should have some idea how much loss you will take on a given strategy before you stop. You can set this limit based on historical results and once you get to it, you should quit. However, that's not what I want to discuss here. There are a number of statistical tests you can run to determine if a strategy is, as some would say, broken. However, I think the best test is to simply look at the equity curve and see if it looks out of place with historical results. In that vein, I've created a chart which puts the worst five month drawdown for each year of the strategy on the same chart. Each period ends at the low drawdown for that time period. All I will tell you is that each data sequence comes from a different calendar year. Try to figure out which is the current drawdown cycle. I'm not going to tell you which it is right now, but I will tell you it's not the top one.

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