You may hear about maximum drawdown, average drawdown and equity drawdown.

There are different ways that Drawdown can be interpreted. The Through is the lowest-low after a Peak. Despite the Peak only being redefined by a new higher value, the Trough value doesn’t necessarily need to be an all-time low. The account is now at $6,000 however, we would still use the prior Peak value of $11,000 until a new Peak is established. In our example, our investment period spans two years. It is important to ensure the Peak and Trough values used for your calculation are from the same investment period. The drawdown has now increased even though the profit and loss remain the same. They only look the same because the Peak is equal to the initial investment. This calculation looks a lot like how you would calculate profit and loss, but they are not the same. To provide a simple example of how drawdown is calculated, let’s say, for example, you invest $10,000 in an ETF at the beginning of the year. The Peak is an all-time high and Through is a current low after the Peak. The statistical calculation below can be used to calculate the drawdown amount manually if needed.

Being tied directly to performance and risk management, many forex traders look at drawdown as a way to identify weaknesses in a trading strategy. Typically displayed as a percentage (%), and plotted on a line chart to show changes over time, drawdown places a value on the loss of an investors assets or the potential loss, usually after a series of losing trades. A forex trader would typically apply the drawdown function to analyse the performance of their forex trading strategy. Drawdown is heavily relied on by all types of investors, including forex traders, to demonstrate the potential risk associated with an investment. Drawdown is a common principle used to measure the volatility of an investment.

Maximum drawdown formula