When first analyzing the drawdowns of an EA, a good place to start is simply by looking at the equity curve. An EA with a choppy and sporadic equity curve shows a historically volatile EA (see the chart below to the left); whereas a smoother equity curve shows a historically more stable EA (see the chart to the right).
Now, to further quantify the drawdown analysis; there are three measures that many traders look at.
- Max Drawdown:
- This is the largest drawdown (in percentage terms) that the EA has realized over its trading life
- This is the best indicator of a worst case scenario
- A good way to think about this is: If this drawdown occurred immediately after opening your account, could you stomach this type of risk?
- Average Drawdown:
- The average drawdown size (in percentage terms) realized by the EA over its historical performance.
- Calculated by summing up all the losses (%) and dividing by the actual number of losses.
- In most cases this statistic can be provided by your EA vendor
- The average drawdown will give you an idea of what you might typically see (on average) in a peak-to-trough cycle.
- Drawdown Recovery:
- Shows the time frame the trading robot has taken, on average, to recover from a drawdown back to a positive balance.
- A less volatile Metatrader expert advisor will often take longer to recover.
- Keep this in mind before deciding that a fast recovery is a good attribute.
- More volatile EAs often recover quicker, but this is due to large fluctuations and swings in performance.
These risk measurements will certainly be helpful when selecting the right EA for you. Keep each of these risk statistics in mind when analyzing any Metartrader EA, and always evaluate how they fit your personal risk tolerance. There are many more statistics and factors to consider when choosing an EA, and I will explain these in later articles.
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