Keep in mind even though he closed his position at a $151,000 balance since the particular Challenge is based on Open Trades, the system registers the highest equity your account has reached and is called your High Watermark. If John was to enter a position which reaches a $2000 unrealized profit, but then closes the position at only $1000 profit, then our system would record the high-watermark, which in our case would be $152,000 (equity).
This essentially means your account cannot drop below $146,500 at any point throughout the challenge, otherwise, it will be considered a breach of our rules, and your account will be automatically closed.
Starting with $150,000 in Current Balance, your Max Trailing Drawdown is set to $146,500 as we provide you a maximum loss limit of $3500 (this is also visible on your Dashboard). John purchases a Challenge which has a Max Trailing Drawdown based on Open trades. The current balance and current equity will be the same if you do not have any open trades. Any P&L from ongoing trades is not included. As you can see, this is a trailing drawdown, which means each time your current equity/ balance reaches a new high-watermark, your drawdown limit will also trail and rise with it.Ĭurrent equity = Your balance including Open/Ongoing tradesĬurrent Balance = Your balance of closed trades. We use maximum drawdown as one of the key statistics for evaluating our quantitative investment strategies and for deciding on the introduction of new variables in our models.Max Trailing Drawdown refers to the maximum loss your account can suffer overall during the course of the Challenge you are undertaking. Most investors would strongly prefer the first strategy, because it has a much lower maximum drawdown than the second strategy! Furthermore, the length of the drawdown period is shorter. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.įor example: two strategies can have the same average outperformance, tracking error, information ratio and volatility, but their maximum drawdowns compared to the benchmark can be very different.įor instance, suppose that the first one achieves a monthly performance of 1%, -0.5%, 1%, -0.5% and so on versus the benchmark, while the second strategy achieve an outperformance of 1% each month during the first half of the sample, but an underperformance of 0.5% each month during the second half of the sample. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. It is usually quoted as a percentage of the peak value. Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period.
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