|Technical Report on DrawDown: 24th April to 15th May, 2012|
PhiBase V2.2 has been in a sharp drawdown between 24th April and 17th May. The drawdown has been a cause of concern to some of our users, especially members who got started with the EA during 3rd/4th week of April. This technical report is aimed at providing assurance to members that the trades are perfectly in line with the trading strategy of the EA.
Every trading strategy will have the inevitable drawdowns periods - some will have very large floating drawdown, but lower actual drawdown and other strategies will book the losses showing reasonable levels of actual drawdown.
PhiBase Pro uses the later strategy - it is aimed at protecting the user account from blow out. A drawdown of upto 30% is within the acceptable range when using higher risk levels about 10. For lower risk level of 5, the drawdown may reach about 15 to 20%.
We have presented some actual forward trading results and backtest for the same period below:
The above image is the forward test real account equity curve for closed trades running EURUSD between March to 18th May.
The image below is the back test for the same period the last open trades being closed out forcibly to complete the test.
The above back test shows good agreement with the real account equity curve with most trades matching up reasonably well (in spite of version ( 1.23 to 2.2 ) change over in the real account).
The above is presented to validate discussion based on longer term backtest and study/recovery from previous drawdown periods.
The backtest equity curve presented above was conducted for the period Jan 2008 to Dec 2011. Drawdown periods greater than 400 pips have been highlighted in red. Subsequent recovery periods are shaded in green. Larger DD of over 600 pips are marked with red circles.
As can be seen, the EA recovers very sharply from most drawdowns. The price action and drawdowns noticed during the turbulent times in last quarter of 2008 are marked out as #2 and #3. The present DD which is about 600 pips (trading EURUSD only) is very similar to these two periods.
Based on the design of our trading strategy, we are very confident of a very strong/quick recovery and equity trending up again. The current open trades seem to be in a position to help the EA recover from the DD - the Long EURUSD positions entered on 18th May has the trailing SL in place to lock in some good gains.
The current DD was caused due to reaction lag of the long term indicators (D1 and W1). PhiBase has been designed to trade well in both ranging/sideways market as well as trending markets. The array of medium and long term indicators makes this possible. Patterns by themselves deliver a success rate of about 40%. Without additional strategy/market sense interpretation, trading patterns will not be successful in the long run. The array of indicators used by PhiBase makes it possible for the EA to factor in the market sense and consensus positioning. This puts the odds in favour of the patterns thereby increasing the success rate to almost 60%.
Every strategy has a trade-off which needs to be accepted - These are gray areas for the strategy when things will not go well. For trend following EA's the gray areas/trade-off may be ranging-choppy price action. While for a scalping EA, strong trends may be the gray area. Any EA which performs well in long term is developed based on the fact that a single strategy will not be able to perform well in all market conditions.
PhiBase Pro has been developed to trade well in both trending and ranging price actions. Markets are ranging for over 60% of the time and strong trends may account for only about 40%. The gray area for PhiBase Pro is the transition period between ranging and trending price action. Such periods are generally only 2-3 weeks in duration. This explains the periodic short 2-3 weeks drawdowns seen in the back test.
While the long term indicators used on PhiBase enable the EA to work well when in both ranging and trending price actions, they have a lag which result in the some short/sharp drawdowns. But the EA factors in the change in price action within 2-3 weeks and starts trading well again. DD's are recovered very quickly and the new price action is traded normally again. Generally on an average, trends last for about 4 weeks and sideways markets are seen to last between 8-12 weeks.
PhiBase Pro V3.0 is planned for release shortly. The new version will be a major upgrade and implements changes to minimize the DD by reducing reaction time of the EA in adjusting to new price action. Pre-release information of Version 3.0 will be emailed to members as usual.
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