Equity curve and drawdowns

Beginner Questions
1

Is there a right/wrong way to calculate them? Did not find the answers in school thanks

2

Hi,

Equity curves represent you account equity (balance) at each chosen interval, which is usually at the close of each day. So if you plot your end of day closing balance on a chart you can visually see your own equity curve. An example could be $'s on the Y axis and days on the X axis.

However, if you want a true representation of draw-down you will want to record your account balance at the end of every single trade. Imagine if you lost 10 trades on the bounce in a single day, and then later on in the same say you won back all your losses. Your end of day closing balance would show no draw-down, when really this is not the case.

Once you have your chosen interval period, such as days, or at every trade you can either calculate the % change in your account balance; this would give you your equity curve as a percentage of your deposit amount.

In a perfect world a nice equity curve would always show the Y value increasing as you move along the X axis.

The Y axis can either show:

  1. Account balance in $
  2. % of account growth (this would be an accumulated % though)
  3. Account profit in $
3

I would make two arguments against this suggestion. First, it assumes only day-trading, which is not the reality for all (perhaps even most) traders. Second, if you’re only looking at closed trade figures you’re missing in-trade variability, which is an important drawdown factor when trying to assess the timing of your exits.

To my mind the best way to go is to plot account equity (balance +/- open position gains/losses) at some meaningful interval. It may be daily for some, hourly for others. Depends on your trading time frame. Do not just plot your account balance because that can be extremely misleading.

Also, while plotting your account equity, keep track of the Maximum Adverse Excursion (MAE) for each trade, which is how far the market went against you at its worst. That way you can be sure to capture all drawdown info.

4

Good point. This is one of those questions when you know the answer and how to plot an equity curve with ease, but cant quite explain it in words!!

5

Thanks for the reply guys I was a little concerned that there might have been something more to it as I have not specifically come a across a formula for it.