What is drawdown? Maximum Drawdown how much is better? - FX24.net

Big profits always come with high risks! So don't just think about profits, you should care about risk control and capital management. One very important indicator to measure the level of risk is that of Drawdown and its maximum drawdown. So What is drawdown?

What is drawdown?

Drawdown is the deepest decline of an account during the investment process. It measures the degree of fluctuation of the account. In general, the less volatile an account is, the more secure it is and is appreciated by investors. This indicator is commonly used in forex investment.

Regarding the term Drawdown, there are 3 types: Absolute Drawdown, Maximal Drawdown and Relative Drawdown.

Absolute Drawdown: The account decline from the initial capital to the lowest bottom. This index is measured in the absolute loss amount (usd).

Maximum Drawdown: Is the maximum account decline of the account from the highest capital peak ever to the next lowest capital. This indicator is also measured by the change in the largest capital amount (usd). Particularly, this indicator is only recognized when the capital bottom forms after the capital peak.

Relative Drawdown: Is the maximum account decline in%. Meaning Maximum Drawdown is calculated in%. So in all cases you will see that Maximal Drawdown and Relative Drawdown are the same.

Drawdown-how-to-draw-drawdown-fx24

At this point, you can understand what Drawdown is, right? But to understand in detail and to distinguish more clearly about these 3 terms, I used a $ 10,000 MT4 demo account to illustrate how to calculate and drawdown types. Take a look at the sections below:

Find the Drawdown index in MT4 software

To find the Drawdown index of your account in MT4, click the item Account History, then right-click and select Save as Detailed Report As shown in the picture, it will save to the Desktop screen in your computer.

Tim-report-drawdown-in-mt4

How to calculate Drawdown and distinguish Drawdown targets

When you open that report, you will see the following:

  • The first order is negative $ 27 compared to the initial capital

At that time, the level Absolute drawdown and Maximum drawdown to the present time is 27 (0.27%).

Drawdown is the drawdown
  • Subsequent orders increased to $ 8.35 profit on initial funds

Although the account goes up, your Drawdown indicator is still only 27 (0.27%), because it only recorded the largest decline ever occurred before.

Maximum-drawdown-2
  • The next order lost $ 44.07, but the account only decreased by $ 35.72 compared to the initial capital

At that time, the level Absolute drawdown Your is 35.72, because it's compared to the initial capital. But your maximum Drawdown (Maximum Drawdown) is already 44.07 (0.44%), because it compares to the highest level your account has ever reached. That is compared to the interest of $ 8.35, when the account reaches $ 1,000.

In other words, Maximum Drawdown is the distance between the peak and the highest capital ever reached.

Intelligent-Relative-drawdown-3
  • The next order was a bit more profitable, but the account still lost $ 14.22 compared to the original capital.

Since the peak ($ ​​1008.35) and the capital bottom (9964.28) are established, the fluctuations within these peaks and bottoms do not cause the Drawdown indicators to change. (Compare these indicators between the image above and the image below for clarity.) Unless the volatile capital level exceeds the above range, the Drawdown level will change.

Drawdown-4-width-4

Maximum Drawdown how much is better?

Yes, the answer is: Maximum is lower the better! The objective of the investors is to maximize profits and minimize risks.

The problem is that in investment there is an intangible rule that the greater the risk, the higher the profit and vice versa. So if you focus too much on managing your capital without taking a moderate risk, the lower your return.

According to my statistics and experience, forex trading accounts, the Maximum Drawdown level of the account should not exceed 15% in relative value.


You have just read the article: "What is drawdown? Calculation of drawdown".

Author: Pham Khuong

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