This is a reprint of a thread I posted a couple of years back. I'm reposting it because I believe we could delve further into the discussion with many traders atforexintuitivethese days btw, I still maintain absolutely firm.
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youve all have heard me speak about my favorite trading platform statistic, what I used to call yearly yield . maximum drawdown.

I got around to studying Trading Risk by Grant. Whaddya know, this is his statistic. He calls it ROMAD. I like this title

it got me considering ROMAD, and seeking to visualize the reason it's the most important statistic. Its incredibly easy, yet took me a moment to grasp.

The reason ROMAD it's the most important stat is because it mathematically defines risk vs. reward (really, it defines benefit vs. risk, but its the exact same difference). If you consider it, what's the risk of a system? Its the maximum drawdown! And as the majority of us are trading for bottom line results, reward IS yield. Annual yield divided by risk = ROMAD.

Heres an example...

a rational (and I use that term loosely ) investor will have a maximum amount they're prepared to risk. Lets say you have a 10k account, and the maximum that you need to risk on the system is 3k. To put it differently, you're willing to bear a 30% drawdown before you quit using the machine.

Keeping this in mind, pretend you have two systems to choose from.

SystemA / / ROMAD = 1.8
systemB / / ROMAD = 1.0

since we are just ready to risk 30k, no matter which system we choose, systemA will give us 80% higher annual returns than systemB. Because for every one dollar risked (in the kind of maxDD) you get back $1.80 back (in the kind of annual yield ) with systemA. And for systemB you only get $ 1 for every $ 1 back risked. Thats a complied way of stating systemA has a greater risk . benefit!

ROMAD = avg. Annual yield / maximum drawdwon
ROMAD = REWARD VS. RISK