![]() Together, those 5 trades can create a net drawdown. For example, I could have 2 losses followed by 1 win and 2 further losses. There could be wins mixed in with the losses that produce an overall drawdown. Note: Drawdowns do not have to have consecutive losses. The maximal drawdown is normally a dollar amount, and the relative drawdown is normally the maximal drawdown stated as a percentage. This is the largest drop in account value from a previous peak. This measurement is most useful when starting as a trader because most traders at the beginning will want to ensure they protect some portion of the initial deposit against future losses.Ībsolute drawdown is normally stated as a percentage (rather than a dollar amount). It is ‘absolute’ because it always uses the initial deposit as a fixed or absolute value to measure the drawdown. For example, am I still trading according to my rules? Or am I taking emotional trades that are not part of my strategy? Types of DrawdownsĪbsolute drawdown measures by how much an account value has gone below the initial deposit. But it could also be because my skills have declined-whatever the reason, I want to investigate. This could be because market conditions have changed. If my drawdowns become more frequent or larger, it indicates my trading is not as good as it used to be. The size and frequency of drawdowns tell me about the health of my trading, even if I am profitable.
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