How the maximum drawdown parameter is calculated
Maximum drawdown is the maximum observed loss from a peak to a bottom of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period.
It shows the maximum potential risks of investor in % through the period if he invested at peak and withdrawn all money on the bottom.
Note
How can it be used in sales?
When investor thinks about investing in a strategy, he needs to be prepared to hold a risk not less than previous reached Maximum Drawdown.
Where the maximum drawdown is shown
Leaderboard
Statistics page of each account
Formulas for maximum drawdown calculation
Investment platform has 2 built in formulas for calculation of Max DD and showing it to investors:
From High Water Mark of Return in %
From Net Deposit
Formula of maximum drawdown based on HWM of return
Return_Max_DD = ((Return_2+100)-(Return_1+100)/(return_1+100))*100%, where is
Return_1 — is Max Return in % since the beginning of the period (Peak)
Return_2 — is lowest Return in % since the beginning of the period till the end (Bottom)
Note
Most common formula in the world. Usually when somebody uses Max Drawdown term, he means the value calculated based on High Water Mark of the Return that is based on Equity.
Deposits and withdrawals doesn’t affect the value of Max DD based on that formula.
Formula of maximum drawdown based on Net deposit
NetDW_Max_DD = ((Lowest_Equity)-(NetDW)/(NetDW))*100%, where is
NetDW → Sum of deposits - Sum of withdrawals
Lowest Equity → Is lowest equity of account
To be more precise, It is calculated every single row in database, and the smallest value is saved as maximum drawdown.
Note
Withdrawals can affect the Max DD value and make it bigger.