What is Account Drawdown?

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:

  1. Current Drawdown – This is the current active drawdown that the account is facing owning to the negative value of the open trading positions.
  2. Fixed Drawdown – This denotes the negative value of trading positions that have been closed.
  3. 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.

Read more finance related items here.

Leave a Reply