Can someone please explain to me what it means when people say "drawdown" or "max drawdown" or "daily drawdown" I am not sure what they are reffering to. Is this the loss amount of a trade or something else? Sorry for the ignorance, i am just learning. Thanks-
Drawdown is simply the decline in your account equity. "max drawdown" is usually referenced in a cumulative sense, peak-to-trough. "Daily drawdown"... net sum of wins minus losses for a negative return day. Or the low equity point of your day.... If your trade had been -5% at one point, but close at -2%, your "drawdown" would be -5%.
When you put moey in the bank...You in interest on your balance...say 1% today. Your balance grows and the interest compounds and in 100 years it might double..there are some calculators that figure this out. But you never lose your original balance assuming it is insured. It does not have a market value in this case...however some might argue the cost of living might exceed the growth...but let not go there. Now, when you buy an Equity it can pay a dividend and get some percentage based on the number of shares you own. However your value on the shares can drop.....so you can have a great dividend yield but the value would drop perhaps making you negative at the day you liquidate. or vice versa...you could collect the dividend and the value could go up on the shares too.... You could buy an Equity (stock) and get no dividend and the price could go up and down over your holding period. The time that you realize the result of this going up and down is the day you sell and put money in your hand. It does not matter what you have on paper...until you have green in your hand. Now you can hold a basket of stocks in a group and they all average out up and down and the net effect could be plus or minus from day to day...but again...this is only realized when you liquidate and get green. You could buy a Futures contract and the same applies. Drawdown is simply durig the holding period what does the loss show on paper? NOT IN GREEN. What are the extremes over time, is the question? Many systems of trading refer to this....leveraged Future traders pay particular attention to these figures, to determine stops, balance of account for margin purpose and stress to be anticipated. Hope this helps. Michael B.
Max drawdown is the maximum a particular trading system allowed an account to go into the red during the test period.
Technically, that's incorrect. You could go through a significant drawdown without the account going into the red. For example, you could start with 20 winning trades in a row, suffer a 99% drawdown, and still be "green" in your account (i.e., above where you started. Drawdown is the difference between an equity high and the next equity low, until the point a new equity high is reached. Once you have a new equity high, you use it and the next equity low to determine the drawdown. The maximum drawdown is the greatest difference seen during the time period. However, often the maximum drawdown is taken right off the bat, just as you describe. People then get discouraged with their results, quit, and lock in the drawdown. Been there, done that, wearing the souvenir t-shirt.