In my videos, I frequently use the term "drawdown". Many of you asked me to explain the meaning of that term and share some examples.
The account drawdown is the highest observed loss from the highest value of the deposit to the lowest value of the deposit at a certain period of time.
Imagine you started to trade with 10,000$ account. At the end of the year, your account size reached 15,000$. However, at some point through the year the deposit value dropped to 6,000$. It was the absolute minimum for the one-year period. At some point, your net loss was -4,000$ or 40% of your account balance. The account drawdown is 40%.
❗️Knowing the account drawdown is very important for the risk assessment of the trading strategy. Usually, 50% and bigger drawdown signifies an extremely high risk.
There are 3 types of drawdown to know.
Current drawdown - a temporary drawdown associated with the negative total value of opened trading position(s) at present.
Once you start trading with 10,000$ deposit, you open several trading positions. Being opened, with the constant price movements, your potential gains fluctuates from positive to negative. For examples, with 3 active trades: EURUSD (-500$ at present); GBPUSD (+200$ at present); GOLD (-100$ at present) your current account drawdown is -400$ or 4% of your deposit.
Fixed drawdown - the negative value of the closed trading position(s) at present for a certain period of time.
While some of your trades remain active, some are already closed. Imagine the same deposit - 10,000$. On Monday you opened 6 trades, 2 still remain active and 4 are already closed. Your total loss from your closed trades is -500$. Your fixed Monday's drawdown is 5%.
Maximum Drawdown - the maximum observed loss from the highest value of the deposit before a new maximum is reached.
Starting to trade with 10,000$ you are already trading for 5 years. Your account were growing rapidly and at some moment it reached 25,000$. Then the recession started. You faced a dramatic loss of 12,500$ before you started to recover. That was the maximum observed loss for the period. Your maximum account drawdown was 50%.
❗️Different types of drawdown give a lot of insights about a trading strategy. Its proper assessment will help to spot a high risk strategy and to find a conservative one. Constantly monitor your account drawdown and always check the numbers.
What is your highest account drawdown?
❤️If you have any questions, please, ask me in the comment section. Please, support my work with like, thank you!❤️
I was looking for information on max DD, thank you for your explanation.. however, to my surprise, im back testing on my on personal strategy that result in winrate 100% (higher time frame, took 1 trade every 2-4 weeks or so), I'm wondering how max DD showing negative result (eventhough it a very small compare to the overall net profit). Is it even possible to have a (-)DD in this scenario??
Crixtade
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Nice piece
relievedDinosa30033
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A big Thank you sir,for this very clear presentation. After reading ,there is no confusion about the term drawdown. Earlier I used to conjure up different meaning of the term ,which were though somehow accurate,never quite represented the true meaning as you explained here.
stockwinner
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Very good narration. Thank you
RKDharmik
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perfectly explained ....Can you please share information on how to manage risk in options trading and how much should be the capital allocation behind 1 lot trading