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Drawdowns?

  • #1
  • First Post: Apr 6, 2009 5:50am Apr 6, 2009 5:50am
Stupid question guys... what are drawdowns? If you set a stop loss and get hit, your account takes a battering. How is this different to a drawdown? Or is a drawdown the case where you have multiple stop losses in a row? I just don't understand the definition of a drawdown.
  • #2
  • Apr 6, 2009 6:18am Apr 6, 2009 6:18am
Multilple loosers in a row

Best regards


Dale
  • #3
  • Apr 6, 2009 6:31am Apr 6, 2009 6:31am
drawdown = floating loss ...
To Live is the rarest thing in the world , Most people exist , that is all
  • #4
  • Apr 6, 2009 6:38am Apr 6, 2009 6:38am
Drawdown = Loss counted from highest balance point in percent.

If you start with 1000 USD trade your account to 1800 USD without losing the next trade is a loser and brings you down to 900 USD. That's 50% DD.
  • #5
  • Apr 6, 2009 6:40am Apr 6, 2009 6:40am
Quoting Tjpld
Drawdown = Loss counted from highest balance point in percent.

If you start with 1000 USD trade your account to 1800 USD without losing the next trade is a loser and brings you down to 900 USD. That's 50% DD.
always thought drawdown is unbooked loss ... guess i am wrong ...
To Live is the rarest thing in the world , Most people exist , that is all
  • #6
  • Apr 6, 2009 6:42am Apr 6, 2009 6:42am
No I did some harakiri trading once which yielded 2000% with about Max DD 8% even when I had around 30% floating loss during some time.
  • #7
  • Apr 6, 2009 9:49am Apr 6, 2009 9:49am
Quoting Tjpld
No I did some harakiri trading once which yielded 2000% with about Max DD 8% even when I had around 30% floating loss during some time.
Ok this is good... this is what i'm confused about... you had a floating loss of 30% at one point yet your max draw down is 8%. How is that possible? Wouldn't a stop loss of 8% prevent you from having a 30% flaoting loss?
  • #8
  • Apr 6, 2009 10:06am Apr 6, 2009 10:06am
edit: nm
  • #9
  • Apr 6, 2009 10:33am Apr 6, 2009 10:33am
Quoting Tjpld
No I did some harakiri trading once which yielded 2000% with about Max DD 8% even when I had around 30% floating loss during some time.
Different software computes Max DD% in different ways. The way you describe (Max Balance to Min Balance) is used by Metatrader I believe. This leads to one of Metatraders's backtesting limitations when testing strategies that open multiple positions and only close them when they are in profit - negative equity during the test period that would trigger a total account loss, yet rosy backtests because positions weren't closed and it is based on ending balance and ending equity.

I prefer Max Equity peak (not balance) to Minimum Equity trough as the Max DD % calculation because it gives a better idea of whether a particular strategy will trigger a margin call at a broker, and thus how to best size positions. It also tells you how much against you a particular market can go with a strategy so when live trading you can know better what to expect.

As an aside, one of the most helpful statistics I've found for evaluating system performance is Net Profit / Abs(Max DD). Combine that with average profit per trade and you have two very good objective means to rank strategies and know which one is better and which strategies are viable.
  • #10
  • Apr 6, 2009 1:14pm Apr 6, 2009 1:14pm
Quoting Atomic_Sheep
Ok this is good... this is what i'm confused about... you had a floating loss of 30% at one point yet your max draw down is 8%. How is that possible? Wouldn't a stop loss of 8% prevent you from having a 30% flaoting loss?
Nope you open 3-4 orders they can have as much floating loss until they reach Margin Call. If they come back you can close all at some point. 2-3 may be in profit and the last one has a small loss. So you get temporary huge floating loss but still build the acconut with only minor losses.
If you never have a losing trade your DD will be zero no matter how much floating loss you had.
  • #11
  • Apr 6, 2009 4:41pm Apr 6, 2009 4:41pm
Quoting Tjpld
Nope you open 3-4 orders they can have as much floating loss until they reach Margin Call. If they come back you can close all at some point. 2-3 may be in profit and the last one has a small loss. So you get temporary huge floating loss but still build the acconut with only minor losses.
If you never have a losing trade your DD will be zero no matter how much floating loss you had.

from a trading point of view, i guess that makes sense. but froma banking/accounting point of view or an investment/reporting view, it is measured from max equity to min equity, so a floating loss is drawdown. in your own records, using balance is fine, but if you were reporting to investors/clients/banks/NFA, they would want it in terms of equity.
  • #12
  • Apr 6, 2009 5:02pm Apr 6, 2009 5:02pm
Quoting blacksun1
from a trading point of view, i guess that makes sense. but froma banking/accounting point of view or an investment/reporting view, it is measured from max equity to min equity, so a floating loss is drawdown. in your own records, using balance is fine, but if you were reporting to investors/clients/banks/NFA, they would want it in terms of equity.
Sure but what I said is what MT4 measures as Max DD in it's Detailed Statement.
  • #13
  • Apr 6, 2009 5:19pm Apr 6, 2009 5:19pm
Quoting Atomic_Sheep
Stupid question guys... what are drawdowns? If you set a stop loss and get hit, your account takes a battering. How is this different to a drawdown? Or is a drawdown the case where you have multiple stop losses in a row? I just don't understand the definition of a drawdown.
A drawdown is the negative hit a trader take in pursuit of their own belief for where the market will be going.

You could even see drawdowns as retracements, but only if you picked the right direction of the trade.
  • #14
  • Last Post: Apr 6, 2009 8:05pm Apr 6, 2009 8:05pm
Ok thanks guy... I get it now.
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