![]() ![]() Let us imagine that this same trader opened these same 5 positions but at the same time, and that the maximum latent losses were made at the same time. ![]() In other words, just one trade made more loss.Įxample 2 to clarify maximum drawdown on a portfolio/trading account: This implies that the maximum latent loss on a single trade was greater than the total performance of the day. In total, the trader generated a capital gain of €50 on this trading day, with a maximum drawdown of €60 (trade 4). Trade 5: result: +€50 Maximum latent loss during the range of the trade: -€20 Trade 4: result: -€60 Maximum latent loss during the range of the trade: -€60 Trade 3: result:+€50 Maximum latent loss during the range of the trade: -€20 Trade 2: result: -€10 Maximum latent loss during the range of the trade: -€40 Trade 1: result: +€20 Maximum latent loss during the range of the trade: -€10 NB: the question is, knowing whether the 2 other trades had performed well at another time, because otherwise the maximum drawdown would be the sum of the latent capital gains.Įxample 1 to clarify maximum drawdown per trade:Ī trader opens 5 trades during the day. If this trader told you he had a drawdown of €40, he would be talking about what I call the “drawdown risk”.Įffectively, the trader is talking about the maximum latent loss of one of his 3 trades. This also includes that trades were inevitably skipped, one after the other. Įffectively, trade 1 earned €10, then trade 2 lost €20 (so a maximum drawdown of -€10), to finally gain €50 with the last trade. If this trader told you he had a drawdown of €10, he would be talking about what I call the ”performance drawdown”. ![]() Trade 3: result: +€50 Maximum latent loss during the range of the trade: -€20 Trade 2: result: -€20 Maximum latent loss during the range of the trade: -€40 Trade 1: result: +€10 Maximum latent loss during the range of the trade: -€10 These notions do not really exist but it is important to distinguish the drawdown which includes all maximum latent losses added together (all trades combined), from the drawdown calculated only on final performance (closed trades). The drawdown of a portfolio or a trading account therefore accumulates all the latent performances of the open positions.įinally, it is important to know that traders usually couple their maximum drawdown with the Profit Factor to get a better statistical view.ĭon’t confuse Performance Drawdown and Drawdown Risk The maximum drawdown of a portfolio, or trading account, is the maximum unrealised loss recorded during the entire range of all open trades. The drawdown makes it possible to measure risk, trade by trade. So the trader would have left his trade in loss, and finally cut it in profit. A trade may have been closed with a win/profit, while registering a large drawdown. The maximum drawdown of a position or trade is the maximum unrealized loss recorded during the entire range. The maximum drawdown over a given period is the maximum loss recorded by a trading strategy over that period.ĭrawdown can be calculated as an amount or as a percentage.Įxample: A trader could talk about a drawdown of €150 or 1.5% on his €10,000 trading account. More simply, drawdown measures a trading strategy’s loss, and therefore its risk. Effectively, strong performance on a trading account does not mean that the trading strategy applied is really profitable and without risk. Traders generally talk about drawdown or maximum drawdown to judge the quality of their trading and risk management. ![]()
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