Understanding Drawdown Calculation
Below is the English version
Drawdown represents the decline from a peak to a trough in your trading equity before recovery begins. It measures risk and potential capital loss in trading strategies. This article explains how drawdown is calculated and interpreted.
What is Drawdown?
Drawdown measures a consecutive loss from the highest equity point to the lowest point, ending when profit is earned again. Maximum drawdown represents the largest percentage decline during a specific period or since strategy creation.
Higher maximum drawdowns typically indicate greater risk of capital loss. The calculation includes both closed and open positions as it's based on equity changes.
Drawdown data updates hourly and appears in the strategy overview section. You can view a brief description by clicking the information icon.
Maximum Drawdown Formula
The calculation follows this pattern:
ini
Drawdown = (Equity at end of drawdown - Equity before drawdown) / Equity before drawdown
The maximum drawdown is the largest negative percentage among all drawdown periods.
Practical Example
Consider this scenario:
Initial equity: $1,000
Profits increase equity to $1,200
Withdrawal of $200 returns equity to $1,000 (withdrawals don't affect drawdown calculations)
Loss of $300 reduces equity to $700 (drawdown begins)
Further loss of $500 drops equity to $200 (drawdown continues)
Profit of $900 raises equity to $1,100 (drawdown ends)
First drawdown calculation: ($200 - $1,000) / $1,000 = -80%
Loss of $200 reduces equity to $900 (new drawdown begins)
Additional loss of $300 drops equity to $600 (drawdown continues)
Profit of $600 raises equity to $1,200 (drawdown ends)
Second drawdown calculation: ($600 - $1,100) / $1,100 = -45.45%
The maximum drawdown in this example is -80%, as it's the larger of the two drawdown periods.
Note: Maximum drawdown is capped at -100% as a percentage measure.