What is drawdown in trading?
A drawdown in trading is the percentage you are down from the latest equity peak. It’s a peak to trough decline over a certain period. If your equity is not at an all-time high, you are in a drawdown.
Drawdowns are better valued in percentages. A 10000 drawdown is 10.5% of the peak of 95000
Thus, the drawdown is 10.5%.
The drawdown ends when your equity sets a new peak above 95000 and the process starts over again.
Below is a graphical example of a drawdown in the BANKNIFTY options startegy, The first pane is the equity curve of BANKNIFTY, while the red color in the pane below shows the percentage drawdown from the latest peak in BANKNIFTY optons startegy.
The drawdown above shows, for example, that the BANKNIFTY options set a max drawdown in late November 2020 that is 16000(0.8%) approx
Average drwadown was around 10000(0.6%) approx.
Next Questions -
Why Is Max Drawdown Important In Trading?
All algo trader, options traders are invited to share their answers and let's see who comes up with the best answer.
I would appreciate it if you could share as much as possible.
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