## Drawdown Calculator

## How to use the calculator?

Simply enter the starting balance, the number of consecutive losses and the loss per trade (in percent) to calculate the expected drawdown

## What exactly is Drawdown?

When determining the level of risk associated with a trading system, drawdown is one of the most important aspects to consider. You may often hear the expression “there is no benefit without risk,” but the question is, how much of a risk is too much?

With the help of a drawdown value, you will be able to immediately determine the level of risk that the investment has acquired.

Drawdown refers to the percentage or monetary worth that has decreased by the most from its peak (the greatest point) to its valley (the lowest point).

For instance, if an investment has a drawdown of 50%, this indicates that there was either a realized or non-realized loss of 50% of the value of the investment at some point in time.

## How To Calculate Drawdown

Let’s imagine the highest amount in your account is $100, but then it lowers all the way down to $72: That yields a loss equal to (100-72/100)%, or 28%.

When the account reaches a new high point, you must search for a new low point so that you may compute the drawdown for the account. You have reached a new maximum drawdown if the value you are receiving for drawdown is greater than the value you were getting before.

## How To Calculate Drawdown

When comparing two different trading systems, a trading system with a larger return does not necessarily signify that it employs a superior trading strategy; rather, it may simply indicate that it took more risks than the system with the lower return. If you want to determine which trading system has a better risk to reward ratio, all you have to do is divide the return by the drawdown. The trading system with the greater value is the one that traded with a lower amount of risk while still achieving the same level of return.

Take, for instance:

A trading strategy (a) that has a gain of 50% and a drawdown of 10% has a risk ratio of 5.

trading system (b) has a risk ratio of 2.8 because it has achieved a gain of 70% and suffered a drawdown of 25%.

Therefore, despite the fact that system (b) generated a better return, it practically required double the amount of risk as system (a). Some investors would rather have a larger return, while others would rather limit their exposure to risk as far as possible and would so choose system (a).

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