Account Drawdown is the maximum loss observed from the view of the account value.
For example, let’s consider my trading account had a deposit value of Rs. 100, and is at a value of Rs. 120 today. But it was around Rs. 70 sometime during this year. So the lowest is a difference of 100-70 = Rs.30, or at 30% drawdown.
The account drawdown denotes the risk associated with the trading account. While it’s common for trading accounts to have drawdown throughout its lifetime, anything above 50% does demote a very high risk. So it’s time to reevaluate the trading strategies and make adjustments.
There are 3 types of drawdowns:
- Current Drawdown – This is the current active drawdown that the account is facing owning to the negative value of the open trading positions.
- Fixed Drawdown – This denotes the negative value of trading positions that have been closed.
- Maximum Drawdown – This is the maximum observed loss taken from the highest point value of the deposits in the account.
The different types of the drawdowns provides a lot of insights to the strategies being used. And the information should be used to update strategies according to the risk threshold of the investor.
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