Choosing a Metatrader Expert Advisor (part 2)
What is a drawdown of an MT4 EA?
This is one of the essential risk indicators when deciding on an EA. A percentage is calculated when the EA trading loses its peak to the trough or in other words, the percentage between the current high point to its next low point. This percentage is known as drawdown and it depict potential drops in value and the general volatility of the Expert Advisor. The first drawdown is done by evaluating the equity curve of the EA. This evaluation is done by reviewing trading charts. Big uneven movements indicate a larger percentage of drawdown. This also shows that the Expert Advisor is volatile.That is why on the first example EA2 was rejected. The max drawdown is higher than EA3 even when the PF is above 1.
There are three measurement of drawdown that you should be aware of, max drawdown, average drawdown, and drawdown recovery.
Max Drawdown: This is the best indicator in analyzing worst-case scenario. The max drawdown is vital in deciding whether the trader is able to bear the potential risk in regards to the particular EA. Based on the EA historical data, there would be a point the Expert Advisor had hit a high percentage of drawdown. This is the max drawdown and possibly losses had occurred during this time. Now, you have to assume that this drawdown is likely to happen the moment you start trading using this particular EA. Ask yourself whether you are comfortable with the potential risk. If not then you need to consider other EA with lower max drawdown.
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Average drawdown: As the name implies, the average drawdown is the mid percentage of drawdown within the historical data of that particular Forex Robot. To calculate this drawdown, you need to know the total of drawdown and dividing it with how many times, the drawdown occurs. This results in the average drawdown.
It is quite troublesome to calculate, as you would be given a fair amount of data. Nevertheless, this particular analysis is vital in your decision-making. Therefore, if the average drawdown is not provided readily, using the EA, you will need to contact the Forex Robot vendor to get the data. If you find the vendor is reluctant to provide you with the data, reject the Forex Robot and any other EA produced by this particular vendor. This is one of the major warning sign of a poor Forex Robot. In later chapters, we will look deeper into other warning signs.
For the time being, let us focus on the data. Most vendors will be able to provide this data easily. With this information, not only you will be able to discern the average drawdown but you will also be able to see the EA average fluctuation over a certain length of time. Let say, you take the smallest drawdown and the highest drawdown that happen in the last three months. Using the data, you will get the average drawdown of those three months. Therefore, if there is no clear indication of large movement in the market, it is possible the average drawdown the coming month would be similar. Ask yourself again; are you able to bear with the risk involved? Is the risk too high or is it bearable?
Recovery Drawdown: This drawdown show how long it takes, on average, for that particular EA to recover from the lowest point and return to a good positive level. The recovery period is essential in evaluating this EA. Now, we mentioned that volatile MT4 EA is an indication of something that all traders should avoid. However, those with stable historical data would also show a longer recovery period. However, you should not worry on this. Low recovery period also means that it is more stable and steady, require less maintenance, and risk management. Look for this factor on your EA if you are gunning for a steady consistent growth of capital.
In conclusion, on the drawdown analysis, it is good to have all the data for max drawdown, average drawdown, and drawdown recovery. However, it is better if you combine the three analyses in choosing your EA. The combined analysis would show you the level of volatility, how long, in average, for the EA to recover from losses, and if the overall potential risk in using the MT4 EA is tolerable or too risky for you.
For the time being, we are still looking at the second tangible factor on choosing an MT4 EA; Measuring Your Profitability.
Understanding the drawdown is in other words, understanding the risk on using the MT4 EA. Apart from the drawdown analysis, we should look at another item that determines the profitability factor.
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Posted by Borys F at 1/28/2012 11:09 PM 
Categories: expert advisor
Tags: forex robot mt4 ea expert advisor best forex robot 2010 best forex robot 2011
Categories: expert advisor
Tags: forex robot mt4 ea expert advisor best forex robot 2010 best forex robot 2011
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