Drawdown
Candlefocus EditorDrawdowns are an important metric when assessing the performance and risk of trading strategies, as it measures how much an account has dropped from a peak. A long and deep drawdown can be indicative of a strategy that is performing poorly and is at risk of continued losses.
Drawdown can be measured on a variety of time frames, from days to weeks or even months. Generally, traders look for strategies with shorter drawdowns, so that their capital can recover faster. However, some strategies can have long drawdowns, but still be profitable if the profits made up for the losses during the drawdown.
It’s important to consider the time it takes to recover a drawdown when assessing strategies. A drawing that takes too long to recover could add an element of risk to a trading strategy, since investors may not be able to continue investing while they wait to make back their losses.
It’s also important to note that drawdown and loss aren’t necessarily the same thing. A drawdown is a peak-to-trough metric, while loss typically refers to the purchase price relative to the current or exit price. For example, a trader who buys a stock for $50 and it drops to $40 before recovering to $60, still has a 20% drawdown, even though the stock ended up being profitable.
Overall, drawdowns are an important tool for measuring performance and risk when assessing trading strategies. They measure the losses taken from the peak of an investment or trading account, and must be considered in terms of the time it takes to recover them. Taking into account drawdown, alongside other factors such as wins and losses, helps investors to make more informed decisions when selecting the right strategies for them.