@madank - thanks for the kind words! you are a major +ve influence on my trading. i am looking forward to the meetings too!
@ncube thank you ncube for the math. i'm embarrassed by my laziness to put forth a sample distribution as an eg. while raising the issue! they should make more people like you and madan
i don't completely disagree with your example. nor do I have a solution to the problem raised.
here are the actual results from what we can say is a good system (ignoring charges though!)....
total trades: 101 - over 18 years. (actually 121 but there were 20 break-even trades. so, let's ignore them)
win:loss count = 61:40 (approx 60%) - this is very good for a trend following system
(to be honest i cherry picked this one because i wanted to prove myself wrong)
payoff (avg. profit: avg. loss) = 27,400 : 10,276 (~2.7). (because the break-even trades are ignored, this is low. if break-even trades were to be considered (as amibroker does), the payoff will rise to ~4.
max consecutive losses = 5; max consecutive profits = 6
since this is a good system, let's trade it aggressively with 1 lac --> compounding after every trade so that profits are reinvested eg. invest 10% of total capital (i.e. start with 1o,000 to trade 1st signal. it made a loss of 638 --> next trade will be with 9,362 (10k - 638)....so on and so forth.....
at the end of 121 trades, 1 lac becomes 13.6 lacs --> not bad eh? CAGR = 16%. Max DD? 15% --> CAGR/Max DD = 1.04!!
few observations:
1/ max DD = draw down from peak. however, for simplicity i have computed draw down based on the capital remaining after a trade is closed. possibly the actual draw down will be more than this.
2/ above eg. considers just 121 trades. obviously risk of dd and risk of ruin will shoot up with an increase in the no. of trials.
3/ since we are reinvesting profits, after a point we come close to investing the entire capital. (entire capital = original 1 lac + cumulative profits). this may appear foolhardy but then compounding is what makes such high returns possible in the 1st place.
4/ increasing the original capital (i.e. reducing the fraction of capital invested) will lower the MAR further. OTOH if the fraction is increased MAR will increase. in the current case it increases to a max of 1.4 (31% : 22%).
5/ i'm also attaching an excel file with the trade list so that we can play around with the nos. if required. perhaps i'm making some elementary mistake.
i'm not nitpicking or trying to prove a point - just thinking out loud....
cheers