# Drawdown calculation for strategies

I am developing a trading strategy for currencies. I am trying to find an indication for risk, something like Sharpe ratio or Sterling ration; for that, I thought of using the (maximum) drawdown measurement, but have encountered a problem.

The drawdown (at least according to Wikipedia), saves a peak's value, and for every value later which is lower than the value of the peak, calculated: $DD = {(peak - value) \over peak}$.

The problem arises when the first "peak" of the trading strategy is of value 0. That forces me to divide by 0. For backtesting purposes, I always assume the net value of the "robot" is 0, and from that point on it makes profits or losses. Other assumptions may solve the problem, but arbitrarily; different decisions for initial value will lead to different drawdown calculation results.

A second thought about drawdowns regard their effectiveness; do you think that simple variation calculation might give a better insight regarding the strategy's risk? And even then - how would you combine average profit and variance? And how would you calculate the variance - every trade? Every day? Around 0 or around the line connecting the final profit with 0 during the period? Or around the linear regression?

And if linear regression is involved - why variance and not, say, standard error?

• Start with wealth rather than profits. – John Aug 19 '12 at 16:02