Understanding Drawdown
Drawdown measures the peak-to-trough decline in account equity during a specific period. It shows the maximum loss an account experienced before recovering. Drawdown is expressed as a percentage -- a 20% drawdown means the account fell 20% from its highest point.
Types of Drawdown
Absolute Drawdown: difference between initial deposit and minimum equity. Maximum Drawdown: largest peak-to-trough decline. Relative Drawdown: maximum drawdown as a percentage of the peak equity. Maximum drawdown is the most commonly used metric for evaluating trading systems.
What is Acceptable Drawdown?
Conservative strategies: under 10%. Moderate strategies: 10-20%. Aggressive strategies: 20-30%. Anything above 30% is considered high risk. Remember: a 50% drawdown requires a 100% gain to recover, and a 70% drawdown needs a 233% gain.
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