To calculate this variation, we divide the Maximum Drawdown with the highest point on the account (highest equity) and to change it into a percentage, we multiply the result by 100. To represent the ratio between the Maximum Drawdown and the value of maximum equity, we use the Relative Drawdown. $90,000 is the Maximum measured distance for this account. If we use values from the previous example: Maximum Drawdown = Distance between the highest and lowest points (maximum and minimum peak). If the resulting value is higher than the profit potential of the asset, it is usually a sign of a bad investment (negative RRR).
This can show you the potential loss per trade or sequence of trades. To represent the difference between the account’s maximum and the closest minimum, we use the Maximum Drawdown. If you had an Absolute Drawdown of $0, this would mean you had no risk at all, whereas in our example, the risk we took is $40,000 or 40% in total. It reveals how big the loss is compared to the initial balance. The Absolute drawdown is to show the risk on the account. If we take as an example an Initial Balance of $100,000 and we have a maximum reached value of $150,000, the lowest value of $60,000, then the calculation of the Absolute Drawdown is: $100,000 – $60,000 = $40,000 Here is a formula to calculate the Absolute Drawdown:Ībsolute Drawdown = Initial Deposit – Minimal Equity To represent the difference between the initial balance and the lowest point below that, traders use the term called Absolute Drawdown. It is then divided into Absolute and Maximum drawdown.
We measure the risk involved in our account using the drawdown. We can describe Drawdown as the difference between the highest and the lowest point on your account. Let’s have a look at how these differentiate and how they compare to our Maximum Daily Loss drawdown. Below you can find a chart from the financial media division of Bloomberg showing a drawdown in the Forex pair EURUSD.īut do you know the differences between different varieties of drawdown? For the purpose of this article, we recognize the Absolute drawdown, Relative drawdown and Maximum drawdown. Every analyst and financial news outlet is using drawdown to visualize a loss of value. There are different types of drawdowns and we’ll cover everything in this article. A drawdown is a reduction in the equity value of an investment and an inevitable part of every trading system.