Hello all. I'm back for a shot of nostalgia.
The tear sheet introspection into a strategy's efficacy looks to be truly useful. There is one aspect however, which looks like it's missing. The Ulcer Index, or underwater measurement seems to not represent what I consider a more important measurement. Namely the Surrender or Give-back timespan. This duration measurement is where one finds that one's portfolio has fallen to some historic level indicating that from that point to this you've earned exactly nothing on your money.
The underwater metric seems to measure from peak through a valley then up through the highwater mark. And is useful I suppose. But this other measurement examines the timespans between portfolio highs and the return to those highs -- no matter what has occurred between those points. This timespan, to me, represents the strategy's actual profit retention capability. The duration for this measurement, over the life of a back test, is the true test of whether a human would put up with a strategy and keep it in the market. If you knew that your strategy's portfolio value returned to prior absolute high after a year or so you'd say to yourself, "what the hell! Criminy, I'm back where I started. Forget this thing, I'm outta here." If the back test did that over and over would any trader have the stomach to keep their money in that strategy? Of course not.
What is the psychological maximum for this number? For investors who have a generational time horizon, that number might be years. For traders looking to make a buck every month or three, a six month surrender maximum would be too much.
[Red boxes are the obvious surrender timespans.]