Drawdown refers to a decrease in the level of funds in a trading account due to unprofitable trades over a certain period, typically expressed as a percentage. The maximum drawdown represents the difference between the highest and lowest levels of funds on the account.
In Copy Trading, drawdown for Strategies is calculated in relation to the return of the account for each interval, which occurs as a result of balance transactions (deposit/withdrawal of funds). You can find the calculation example in this article.
Suppose we have calculated the return for a trading account over two intervals (the level of funds at the end of the interval / the level of funds at the beginning of the interval).
|
Return |
Max. Return |
|
| Interval 1 |
1.5 |
1.5 |
| Interval 2 |
0.9 |
1.5 |
The highest return for these two intervals equals 1.5. Let’s mark it as the maximum return on the account. If the return for a specific period matches this maximum drawdown value, the drawdown for that period is zero, indicating no losses on the account.
However, if the return for a period differs from the maximum return value, we calculate the drawdown using the formula:
Drawdown = (1 – (1 + Return) / (1 + Maximum Return)) * 100
Where:
- Drawdown – the drawdown for the interval
- Return – profit on the account calculated for the interval between balance transactions
- Maximum Return – the highest profit recorded on the account during the Strategy’s existence.
Let’s calculate the drawdown for our example above:
- For Interval 1, the drawdown is zero because the return for the first interval matches the highest profit on the account.
- For Interval 2, the drawdown is calculated as follows:
Drawdown = (1 – (1 + 0.9) / (1 + 1.5)) * 100 = 0.24 * 100 = 24%
The highest drawdown throughout the Strategy’s existence is referred to as the maximum drawdown.