How to Calculate Forex Drawdown?

[Paulsy]

A Forex drawdown is a measuring tool commonly used by all types of investors, including forex traders, in order to determine the potential risk involved in an investment. Forex traders typically use the drawdown function to monitor the performance of their trading strategies.

The drawdown is usually shown as a percentage (%) and is plotted over time to show change over time. It represents a loss or potential loss in the value of an investment, usually after a series of losing trades. Due to its direct link to performance and risk management, many forex traders use drawdown as a tool to identify weaknesses in their trading strategy.

Drawdown Formula​

Below is a statistical formula for calculating the drawdown amount or % of a specific investment or portfolio.

Where:

• D(T) = Drawdown Time
• t = Peak
• T = Trough
• X = Variables

Drawdown Example:

For a simple explanation of how drawdown is calculated, let's say, for example, you have a $10000 trading portfolio. The equity in your account drops to $8000 after a bad trade or a losing streak.

Answer: You lose $2000. The account decreased from $10000 to $8000 reflecting a 20% decrease.

10000 (Peak) – 8000 (Through) = (2000 ÷ 10000) × 100 = 20%

Types of Forex Drawdown​

Drawdowns used in forex trading can be divided into three types. These terms are crucial for checking the performance of a portfolio before investing or trading. Furthermore, we can use these different types of drawdowns to determine the potential losses of capital that we might face if we were to use this trading system.

Relative Drawdown​

A relative drawdown reflects unrealized losses. As long as you hold onto your position, drawdowns are temporary and only become apparent once your stop-loss is triggered or when you close your position.

Relative drawdown is the difference between the maximum equity high to maximum equity low, it is not fixed as it is measured on the equity.

Relative Drawdown = Maximum value of equity – Minimum value of equity

Relative Drawdown in % = (Max equity value – Min equity value) / (max ⁡equity value) ×100

Absolute Drawdown​

Absolute drawdown represents the difference between the initial deposit and the smallest equity value, showing how much the equity has fallen below the deposit level. The absolute drawdown only occurs when the account value drops below the initial deposit.

Absolute Drawdown formula = Initial Deposit– smallest equity value

Absolute Drawdown in % = (Initial Deposit – smallest equity value) / (Initial Deposit) ×100

Absolute Drawdown helps to evaluate the results of a trading account.

Maximum Drawdown​

Maximum drawdown is the difference between an all-time high to the all-time low of an account balance.

Max Drawdown Formula = All-time high balance – All-time low balance

Max DD in %= (All-time high balance – All-time low balance) / (All-time high balance) ×100

Maximum drawdown indicates potential downside risk over a given period.

 

[algorithmic-guru]

Bravo Good article for beginners.

 

[forum.forex]

A Forex drawdown is a measuring tool commonly used by all types of investors, including forex traders, in order to determine the potential risk involved in an investment. Forex traders typically use the drawdown function to monitor the performance of their trading strategies.

The drawdown is usually shown as a percentage (%) and is plotted over time to show change over time. It represents a loss or potential loss in the value of an investment, usually after a series of losing trades. Due to its direct link to performance and risk management, many forex traders use drawdown as a tool to identify weaknesses in their trading strategy.

Drawdown Formula​

Below is a statistical formula for calculating the drawdown amount or % of a specific investment or portfolio.

Where:

• D(T) = Drawdown Time
• t = Peak
• T = Trough
• X = Variables

Drawdown Example:

For a simple explanation of how drawdown is calculated, let's say, for example, you have a $10000 trading portfolio. The equity in your account drops to $8000 after a bad trade or a losing streak.

Answer: You lose $2000. The account decreased from $10000 to $8000 reflecting a 20% decrease.

10000 (Peak) – 8000 (Through) = (2000 ÷ 10000) × 100 = 20%

Types of Forex Drawdown​

Drawdowns used in forex trading can be divided into three types. These terms are crucial for checking the performance of a portfolio before investing or trading. Furthermore, we can use these different types of drawdowns to determine the potential losses of capital that we might face if we were to use this trading system.

Relative Drawdown​

A relative drawdown reflects unrealized losses. As long as you hold onto your position, drawdowns are temporary and only become apparent once your stop-loss is triggered or when you close your position.

Relative drawdown is the difference between the maximum equity high to maximum equity low, it is not fixed as it is measured on the equity.

Relative Drawdown = Maximum value of equity – Minimum value of equity

Relative Drawdown in % = (Max equity value – Min equity value) / (max ⁡equity value) ×100

Absolute Drawdown​

Absolute drawdown represents the difference between the initial deposit and the smallest equity value, showing how much the equity has fallen below the deposit level. The absolute drawdown only occurs when the account value drops below the initial deposit.

Absolute Drawdown formula = Initial Deposit– smallest equity value

Absolute Drawdown in % = (Initial Deposit – smallest equity value) / (Initial Deposit) ×100

Absolute Drawdown helps to evaluate the results of a trading account.

Maximum Drawdown​

Maximum drawdown is the difference between an all-time high to the all-time low of an account balance.

Max Drawdown Formula = All-time high balance – All-time low balance

Max DD in %= (All-time high balance – All-time low balance) / (All-time high balance) ×100

Maximum drawdown indicates potential downside risk over a given period.

Good- very knowledgeable

 

[Polakandil]

Good explanations, since drawdown is often used by many investor traders to measure trading performance any robot trading or another trading like as PAMM trading account or copy trading account.

 

[louisegoodman]

Drawdown refers to the reduction in a trader's capital after a series of losing trades and can simply be calculated by getting the difference between a relative peak in the capital minus a relative trough. This is normally noted down as a percentage of the trading account by the traders.

 

[Linsang]

I really liked the way you've explained a complicated concept in such an easy-to-understand way. Only a person with in-depth knowledge can do that.

 

[timothydanie]

Drawdown refers to the reduction in a trader's capital after a series of losing trades and can simply be calculated by getting the difference between a relative peak in the capital minus a relative trough. This is normally noted down as a percentage of the trading account by the traders.

Calculating drawdown also helps in determining the trader’s financial risks.

 

[WalletInvestor]

Very informative post indeed. We need to be familiar with the concept of drawdown since it is a big part of measuring performance accurately.

 

[Wisecrack]

Drawdown is a metric that helps forex traders assess the account balance volatility. In other words, it will tell you how much and how far your account equity will drop after a losing streak. Drawdown is also a good metric to evaluate the performance of a trading system.

 

[Bumblebee]

Thanks for explaining it in such an easy manner. It will be really helpful for beginners to understand the thesis concept better.

 

[Zooscopy]

It measures the lowest point of a specific investment. It can be calculated by subtracting the maximum drawdown level from the high water mark and dividing the difference by high water mark.

 

[flummeery]

A Forex drawdown is a measuring tool commonly used by all types of investors, including forex traders, in order to determine the potential risk involved in an investment. Forex traders typically use the drawdown function to monitor the performance of their trading strategies.

The drawdown is usually shown as a percentage (%) and is plotted over time to show change over time. It represents a loss or potential loss in the value of an investment, usually after a series of losing trades. Due to its direct link to performance and risk management, many forex traders use drawdown as a tool to identify weaknesses in their trading strategy.

Drawdown Formula​

Below is a statistical formula for calculating the drawdown amount or % of a specific investment or portfolio.

Where:

• D(T) = Drawdown Time
• t = Peak
• T = Trough
• X = Variables

Drawdown Example:

For a simple explanation of how drawdown is calculated, let's say, for example, you have a $10000 trading portfolio. The equity in your account drops to $8000 after a bad trade or a losing streak.

Answer: You lose $2000. The account decreased from $10000 to $8000 reflecting a 20% decrease.

10000 (Peak) – 8000 (Through) = (2000 ÷ 10000) × 100 = 20%

Types of Forex Drawdown​

Drawdowns used in forex trading can be divided into three types. These terms are crucial for checking the performance of a portfolio before investing or trading. Furthermore, we can use these different types of drawdowns to determine the potential losses of capital that we might face if we were to use this trading system.

Relative Drawdown​

A relative drawdown reflects unrealized losses. As long as you hold onto your position, drawdowns are temporary and only become apparent once your stop-loss is triggered or when you close your position.

Relative drawdown is the difference between the maximum equity high to maximum equity low, it is not fixed as it is measured on the equity.

Relative Drawdown = Maximum value of equity – Minimum value of equity

Relative Drawdown in % = (Max equity value – Min equity value) / (max ⁡equity value) ×100

Absolute Drawdown​

Absolute drawdown represents the difference between the initial deposit and the smallest equity value, showing how much the equity has fallen below the deposit level. The absolute drawdown only occurs when the account value drops below the initial deposit.

Absolute Drawdown formula = Initial Deposit– smallest equity value

Absolute Drawdown in % = (Initial Deposit – smallest equity value) / (Initial Deposit) ×100

Absolute Drawdown helps to evaluate the results of a trading account.

Maximum Drawdown​

Maximum drawdown is the difference between an all-time high to the all-time low of an account balance.

Max Drawdown Formula = All-time high balance – All-time low balance

Max DD in %= (All-time high balance – All-time low balance) / (All-time high balance) ×100

Maximum drawdown indicates potential downside risk over a given period.

This concept is very nicely and adequately explained. I also tried other resources to understand this concept but they weren't as insightful as this one.

 

[Heartsome]

Very well explained in a very comprehensive manner. Really helpful to get an overview of drawdown.

 

[Isonomy]

The difference between a relative high in the capital minus a relative trough may be used to compute drawdown, which is the drop in a trader's capital following a sequence of losing transactions. Traders usually record this as a proportion of their whole trading account.

 

[Statoscope]

A Forex drawdown is a measuring tool commonly used by all types of investors, including forex traders, in order to determine the potential risk involved in an investment. Forex traders typically use the drawdown function to monitor the performance of their trading strategies.

The drawdown is usually shown as a percentage (%) and is plotted over time to show change over time. It represents a loss or potential loss in the value of an investment, usually after a series of losing trades. Due to its direct link to performance and risk management, many forex traders use drawdown as a tool to identify weaknesses in their trading strategy.

Drawdown Formula​

Below is a statistical formula for calculating the drawdown amount or % of a specific investment or portfolio.

Where:

• D(T) = Drawdown Time
• t = Peak
• T = Trough
• X = Variables

Drawdown Example:

For a simple explanation of how drawdown is calculated, let's say, for example, you have a $10000 trading portfolio. The equity in your account drops to $8000 after a bad trade or a losing streak.

Answer: You lose $2000. The account decreased from $10000 to $8000 reflecting a 20% decrease.

10000 (Peak) – 8000 (Through) = (2000 ÷ 10000) × 100 = 20%

Types of Forex Drawdown​

Drawdowns used in forex trading can be divided into three types. These terms are crucial for checking the performance of a portfolio before investing or trading. Furthermore, we can use these different types of drawdowns to determine the potential losses of capital that we might face if we were to use this trading system.

Relative Drawdown​

A relative drawdown reflects unrealized losses. As long as you hold onto your position, drawdowns are temporary and only become apparent once your stop-loss is triggered or when you close your position.

Relative drawdown is the difference between the maximum equity high to maximum equity low, it is not fixed as it is measured on the equity.

Relative Drawdown = Maximum value of equity – Minimum value of equity

Relative Drawdown in % = (Max equity value – Min equity value) / (max ⁡equity value) ×100

Absolute Drawdown​

Absolute drawdown represents the difference between the initial deposit and the smallest equity value, showing how much the equity has fallen below the deposit level. The absolute drawdown only occurs when the account value drops below the initial deposit.

Absolute Drawdown formula = Initial Deposit– smallest equity value

Absolute Drawdown in % = (Initial Deposit – smallest equity value) / (Initial Deposit) ×100

Absolute Drawdown helps to evaluate the results of a trading account.

Maximum Drawdown​

Maximum drawdown is the difference between an all-time high to the all-time low of an account balance.

Max Drawdown Formula = All-time high balance – All-time low balance

Max DD in %= (All-time high balance – All-time low balance) / (All-time high balance) ×100

Maximum drawdown indicates potential downside risk over a given period.

Well explained and really very informative. Every trader must know about drawdown as it helps in determining financial risks of the trader.

 

[Resplendent]

Forex drawdown is defined as the decline of the position value due to unfavourable movement in the market. It is a method of calculating the loss or decline in the account value (not the real loss, just a decline in the value) due to unfavourable market movement and is calculated as a percentage of the difference between the historical equity high and low in comparison to the equity high

 

[skrimon]

Thanks for discussing Calculate Forex Drawdown.
Have a great day!

 

[geraldinemarsh]

The Forex drawdown is the difference between the highest Forex trading profit and the highest Forex trading loss in a certain time period. To calculate the Forex drawdown, we have to take into account the number of trades that have been made, and the number of trades that have resulted in losses. If we assume that a trader made 300 trades with a 50% success rate, then the trader can expect 100 losses. The Forex drawdown is then (100 losses x % loss in each trade) ÷ (number of trades).

 

[Absterge]

Forex Drawdown means the difference between the highest peak and the lowest trough in a currency pair’s price movement.You can calculate the drawdown as a percentage of the account equity. If your account is worth $10,000, then a -10% drawdown means that you’ve lost $1,000.

 

[Venencia]

This post is a good guide for beginners. Keeping your drawdown in control is very crucial to get successful in trading. The formula is explained well in an easy manner. Thank you for your time and efforts. Appreciating your willingness to share your knowledge to help beginners.