Maximum Drawdown

I keep on thinking I have not been going into details enough on maximum drawdown.

It’s not myyour longest chain of losses. It’s not myyour biggest loss till date. It’s not myyour worst performing year till date.

It is the plunge from myyour absolute equity peak, ie, the stage where Iyou have made the most (presumably that Iwe have actually made money…hehe 😛 ) to the lowest point of myyour trading career so far (presumably that Iwe have not totally devastated our trading capital…hehehe 😛 ).

So the measurement of peak to trough can be through many years and many ups and downs… just like myyour equity chart equating to a down trend stock, lower high and lower low.

Take a look here,
http://seekingalpha.com/article/510841-isolating-downside-risk-in-investment-analysis-downside-deviation-and-maximum-drawdown
Maximum drawdown does not have to be a single smooth line downwards, it’s the peak to trough.

Usually, funds would be driven to closure if they suffer something like 30% drawdown, or 30% down in a single year.

Loss Table

You see, the moment Iyou lose 30%, you literally need to make 50% on your remaining capital … JUST TO BREAK EVEN AGAIN!

Many think that if you lose 50%…you need to make back 50% to get back even….totally wrong…

Imagine you having 20k trading capital…. you bought some shares and soon after , suay suay Greenlight capital says your counter stinks like green mountain coffee… and if dropped 50%, so now you have 10k….. if you make back 50% again…its 15k…not 20k….

Here’s a more interesting and less chim site to read up on losses and maximum drawdown

That’s why it always so important to “take care of your losses” and dun focus too much on trading profits and accuracy….it’s the losses that kill you…worse…it’s the holding on to losing stocks that eliminate you….it’s like kena level 6 “disintegrate” spell and no save….there’s no raise dead here….

Usually, traders derive maximum drawdown from backtesting, not from actual experience…that’s where the info is used best.

So how to apply this info to further enhance the risk management portion of your trading? I will try to explain more next time ok?

cheers

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