While trying to see if my Z12 demo is also within it's statistical boundaries, I think I uncovered why that was near impossible to calculate so far. The important piece of information seems to be missing in the performance report!

Taking the Z12 (M/R 50/10) as an example, the performance report says: Max drawdown -2355$ 9% (MAE -3281$ 12%). I suspect that first max drawdown is calculated (in dollar value!), and 9% is just attached, leading to thinking that 9% is the max drawdown. But it is not! Just by looking at the drawdown curve, there could've been a slightly smaller drawdown (say -2000$) but at the time where equity was much smaller leading to a much bigger drawdown percentage-wise (maybe 20% or 30%), yet I don't see that number anywhere in the report. Could this number be added in the future version, please?

I was also thinking along the lines, maybe I could take the biggest dollar amount (-2355$ in the example) and divide it with the required capital (3762$)? This would be a situation where right at the start of trading, the strategy goes in a deep drawdown. But numbers I get that way, ~63% drawdown in the example, are just way too big to be usable or trusted.

To explain from a different angle, to say that my Z12 is still within statistical boundaries, I would need to compare it's current drawdown of about 40% (after taking into account much bigger starting capital) to the max drawdown as calculated by the backtest. If I compare with 9% (or 12% MAE) numbers from the performance report, I could conclude that it should've been stopped ages ago. But if I compare it with 63% calculated above, then it's supposedly OK that it's 40% in drawdown, although it's really not.

I suspect Z12 had about 20-30% max drawdown in the backtest, but there's no number in the performance report reporting that vital information!

All performance analysis software, including Zorro, normally displays the max drawdown in dollars and in percent. But it cannot tell you when the max drawdown will happen, or what is the same, at which equity value it will happen. That is mathematically not possible.

Thus, the equity value at the time of the max drawdown in the simulation is meaningless and can not be used for calculating the drawdown percent value - a drawdown can just happen anytime.

I'm not satisfied with the answer, which means either you misunderstood my question, or I'm missing some detail that you take for granted. I'm certainly not that interested in the time component of the biggest drawdown. But, I want to know what is its value expressed in percentage.

Let me rephrase the question. If performance report says that max drawdown is 9%, can I trust that there certainly was no 10% drawdown at any point in time that the backtest covers?

IOW, are the dollar value and percentage (of max drawdown) in the report independently calculated? And thus can refer to 2 distinct points in time, one when there was biggest drawdown in absolute terms, and the other when the dollar value was smaller, but equity dropped by a bigger percentage?

Maybe an example is in order again:

1)
Eq peak: $1200
Eq valley: $1080

2) (later)
Eq peak: $12000
Eq valley: $11400

Drawdown 1) is $120, 10%
Drawdown 2) is $600, 5%

Obviously max drawdown in dollars is $600, but percentage-wise max drawdown is not 5% but 10%! What numbers would performance report show in the above example?

a) $120/10%
b) $600/5%
c) $120/10%

To me, this still suggests that the drawdown is linked to the prior run up, exclusively. I don't think you can make this assumption. The only way that it can be linked is if the market type changes, e.g. from quiet bull to volatile bear. And that change happens a few times in the backtest period. Generally mechanical trading does not take into account these types of market type changes, or is not good at it. I won't go into the theory as I understand, but it's a Van Tharp concept.

OR, maybe you want to normalise the drawdowns in that case of using a compounding / profit reinvesting feature. Generally a backtest is best done one a none compounding basis. Later, when you are satisfied that it is profitable and robust, you can play with the position sizing strategy to determine how best to compound the result.

The percentage is of course from the total strategy profit, not from the account equity.

And I still have no answer, is it a), b) or c)?

What we're missing here are the 2 extremely important concepts that I can't accomplish unless I know statistical parameters of the backtest, where max drawdown (expressed in percentage!) is probably the most important one.

1) To adapt my personal risk tolerance to a specific strategy, I need to know its max drawdown, so that I can decide how much capital to invest. For example if backtest say 20% is the max drawdown, and I don't accept more than 10%, I need to at least double the minimum required capital (halving the leverage and max drawdown in the process).

2) To decide when to stop trading a strategy, I need a criteria that describes that event. The best advice I find so far is to declare strategy unprofitable when it has reached double it's max drawdown, as calculated by the backtest. So in out example, if MaxDD 20% strategy reaches 40% drawdown, I better stop trading it. Of course, if I applied my money management strategy from the previous paragraph, I would have lost about 20% of capital by then.

Am I getting through?

One more thing, when you jcl say that your Z's are within statistical boundaries, it tells us absolutely nothing. Because, we don't know what's your criteria? You might say it's within boundaries if you still have any capital left in the account you're trading. Or that you have more than a half. We really don't know, so the statement is to be discarded as vague.

Do you want to compare the max drawdown to the max run up as a percent, regardless of whether they occur consecutively or not? That makes sense to me. It is a ratio that is independent of starting point or place in the equity curve.

If not, then I will need to think about what you are asking.

I look at drawdown in its most basic definition. Here, the one from Investopedia is useful: "The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough."

See, it evens mentions in the second sentence that drawdown is usually quoted as the percentage. But Zorro for some reasons insists on dollar value as more important and adds percentage after, but I'm not sure if that percentage number is really usable and what I'm looking for? That's the whole reason behind this whole thread.

Also, I don't understand why time, point or place in the equite curve is coming as a topic in this thread, when I'm specifically interested only in value, not time?

This is one of those topics where I have specific and very simple issue, yet even after many longish explanations from my side, I'm unable to get this simple answers. I had so many such in the past and did really stupid things because I never got my answer. This time I will persist and not continue with anything until this is resolved. I understand there're language barriers, english is not my primary language, and automated trading is complex subject. Yet...

Another example:

Strategy A drawdowns in time (quoted as percentage): 5.1%, 7%, 12%, 3%, 2%

Strategy B drawdowns in time (quoted as percentage): 12%, 7%, 5.1%, 3%, 2%

For strategy A I want to know max drawdown quoted as percentage. It's 12%.

For strategy B I want to know the same thing. It's also 12%.

Notice how the time when the drawdown happened doesn't matter, I simply want to know what's the biggest value.

Notice also how I do not care about dollar value of drawdown, because it is useless without additional context. But value quoted as percentage is useful without any additional info.

Additional examples:

I have this strategy and it has only 10% drawdown, you can trade it as it is (i.e apply full optimal capital to it), because the drawdown is reasonable. I have another experimental one which has 80% drawdown. I wouldn't recommend trading it with more than 20% of your capital, otherwise the risk od margin call is way too high. Do you agree with those statements? Are they simple and understandable enough?

Now third example: I have a strategy that has $55 drawdown. Is it good or not? Would you trade it or not?

Still trying to parse the above...

So, if there's no profit, there's no drawdown? How do I measure drawdown then if I have a loss? If I'm in drawdown (sic!) from my initial capital?