Know the Type of Drawdown
In simple terms the drawdown is how much successive losses you may have in your trade. Drawdown itself consists of 3 types, namely absolute drawdown, maximum drawdown. And relative drawdown. Drawdown is useful for those of you who often hear a trader say I have 80% accuracy in every 100 transactions.
Absolute Drawdown
Absolute Drawdown is the amount of initial loss that consumes capital.
For example, you make a transaction on your new account, and you immediately get a loss first. Regardless after that you get a profit. But unfortunately these losses have eroded your capital first.
Maximum Drawdown
Maximum Drawdown is the maximum percentage decrease from the initial capital after deducting losses from several consecutive trades. For example a trader opens a new account and makes a deposit of $3000. But unfortunately instead of getting a profit, the trader actually makes a losing transaction in a row. After the losing streak. Your total loss is $900. And your remaining balance is $1100. So your maximum drawdown is the total loss of $900 / $3000 = 30%
Maximal drawdown is the thing that most traders and investors pay attention to. Traders can project whether the results of traders' trading with money management at this time will make the trader's trading account at the margin call level or not. The bigger the maximum drawdown. Then the greater the opportunity for traders to experience a margin call.
Relative Drawdown
While the Relative Drawdown does not describe the actual risk because it is temporary. In essence, the Relative Drawdown takes the ratio of the profit value and the floating value, so this Relative Drawdown can detect whether the trading trading system is superior in profit or floating.
Example: Capital 10000, when your transaction is floating profit $400, it means your equity becomes $1500 and then floating minus $200. The Relative Drawdown calculation formula is as follows.
relative drawdown = [(1000+400) – (1000-200)] / (1000+400) x 100
= ([1400 – 800) / 1400] x 100
relative drawdown = 42.86%
After knowing the types of drawdowns above, it can be concluded that the maximum drawdown is the number that we pay most attention to because it is the maximum drawdown that gives traders a projection about the safety of traders' funds in the trader's portfolio.
What is the maximum number of Maximal drawdown that is considered good?
There are no exact figures. It all depends on the trader's trading system. Because sometimes traders whose portfolios have large drawdowns can get big growth because they use the compounding system. However, by more carefully assessing the maximum drawdown, traders can avoid inappropriate investments. The smaller the drawdown number of a portfolio, the trader can keep the deposit money safe from margin calls.
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