Drawdown by balance. Votes Results
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Drawdown by balance. Discussion
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jpkfox

Biedrs kopš Aug 02, 2010  51 ieraksti jpkfox Oct 27 2010 at 16:23
Sorry, one more message. :) I just want to 'prove' finally here that its not good to calculate drawdown by equity.

I will show an example to illustrate... tihs time a trader who trades every day one trade 250 time a year. So in one year he trades 250 trades.

Lets imagine he trades the following way:
- Only one trade per day.
- He gets every day +25pips from his one trade.
- His trade never goes more than -5 pips negative.
- He always uses risk: 1pip = 1% of the starding balance for that day (so for 100 money 1pip=1money).
- Every time he trades his trade gets his equity first to +150% profit (=+150 pips). Then (always) the trade goes back to +25% profit (=+25 pips).

The facts about this trade when equity is used to calculate his drawdownr:
1) He gets *every day* -50% drawdown (so *not* once per year, but every day!! Sounds very very bad, isnt it :) )
2) His balance goes never more than -5% negative. So according to balance his max drawdown would be only -5%.
3) He will be doubling his account about every third day!! So in 12 days he already has about 1000% profits.

As we can see, in this example -50% equity drawdown mean nothing really. This trader would be the best trader in the whole world. He would be getting 1000% every second week for the whole year.

What was his real drawdown? If you ask me, and this trader trades my money and we share money every month at the end of the month, then I would say his drawdown is -5%....because that is where his first trade equity went. As you can see, in this case equity would indeed define the the drawdown (-5%) but its not the biggest equity drop but how much equity went below the original balance... thats what really matter imo.

Best regards, jpk

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