I keep hearing the word being mentioned and I tried googling the definition and it gave description which did not make sense to me. Does anybody have a simple explanation for drawdown?
IT sounds like a made up word
my 2 cents
when we r using the EA’s or robots to trade…they will trade automatically…while in the process they will make deals and those r ended with profit or loss…
at final profit is expressed as % if gain and loss is with % if draw down.
suppose if an EA makes 20 deals and in those 15 r ended with profit and 5 r with loss …then if ur account balance is increased with some X% then the EA has made X% gained
those 5 deals have decreased the ur balance by some Y% then the EA has Y% draw down…
in this case the ea will be good if x>y.
hope this helps.
Thank you very much fxsrikanth!
So a drawndown is basically what the average maximum percentage loss with a particular trading system.
No, it’s not the average - it’s the absolute worst loss that has occurred on account since the account has been opened.
It’s a measure from the absolute highest point in equity, to the absolute lowest point in equity AFTER this absolute high.
It’s recorded as a %.
- If you opened an account with $100, and you made a $50 gain off a few trades, your balance would be $150.
- Then you lost $40 on a few trades after this peak of $150
- Your drawdown is $40, or 26.67% of the $150
And drawdown is not just a measure used with automated EA trading, it’s used in any and every financial performance fund. Some consider it to be the most important measure of risk out of all the possible performance indicators.
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Drawdown is the% of what you actually hold if you closed your deals at that time compared to your current real balance.
Amazing explanation! I already feel incredible after hearing this. Many thanks.
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JackMarkets, I do not fully understand your explanation.
Definition of ‘Draw down’ by [B]INVESTOPEDIA[/B]
It is the peak-to-trough decline during a specific record period of an investment, fund or commodity. A draw down is usually quoted as the percentage between the peak and the trough.
A draw down is measured from the time a retrenchment begins to when a new high is reached. This method is used because a valley can’t be measured until a new high occurs. Once the new high is reached, the percentage change from the old high to the smallest trough is recorded.
Drawdowns help determine an investment’s financial risk. Both the Calmar and Sterling ratios use this metric to compare a security’s possible reward to its risk.
Some smart guy comes along and says to you I have a trading system that has given me a profit of $10,000 over this past 3 months, please buy it.
You think - ‘great’ and ask what was the max drawdown in that 3 months. He says ’ it was uhmm… $40,000.00’ (he had been injected with truth drug and had to tell) - not so great now.
So it is an important measure of any trading system/approach/method - it tells you the risk/reward ratio being employed.
This definition did not make much sense to me when I first read it and it still is quite a challenge to even understand it now. However, I have a much better grasp of drawdown now. Thanks for adding this contribution. This will only further cement my knowledge.
lol, will do.