![]() ![]() ![]() The services to which the Information relate are NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws and must not be relied or acted upon by any other persons. Important information This disclaimer applies to any documents and the verbal or written comments of any person in presentations or webinars on this website and taken together is referred to herein as the “Information”. We use maximum drawdown as one of the key statistics for evaluating our quantitative investment strategies and for deciding on the introduction of new variables in our models. Most investors would strongly prefer the first strategy, because it has a much lower maximum drawdown than the second strategy! Furthermore, the length of the drawdown period is shorter. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.įor example: two strategies can have the same average outperformance, tracking error, information ratio and volatility, but their maximum drawdowns compared to the benchmark can be very different.įor instance, suppose that the first one achieves a monthly performance of 1%, -0.5%, 1%, -0.5% and so on versus the benchmark, while the second strategy achieve an outperformance of 1% each month during the first half of the sample, but an underperformance of 0.5% each month during the second half of the sample. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. It is usually quoted as a percentage of the peak value. In short, the greater the loss, the more complicated it is to return to the immediately previous moment.Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period. With which to return to have 1,000 euros you must generate 100%. If instead of 20%, you lose 50%, the value of your investment will be 500 euros. If you lose 20%, the value of your investment is 800 euros. It is crucial, because the greater the loss, the more difficult it is to recover the gain. Regardless of the numbers themselves, assessing risk through this measure is crucial. ![]() Since at any time a large part of the capital can be lost. The importance is that there is no use in a trading system that generates very large profits if the maximum loss is very large. This informs us of the risk involved in the trading system. There can be many small drawdowns, but a very large one. The maximum drawdown will tell us what the maximum loss of a trading system has been during a period. That is, when we want to evaluate the risk of a trading system, we measure the maximum drawdown. The "maximum drawdown" is often used as a concept. The drawdown is a very important measure of risk in trading systems. Although the latter is higher in absolute terms, it is important to work in percentages. There are several relevant drawdowns throughout the period. In the graph above you can see the results curve offered by Morningstar for a real fund. Therefore, what is truly relevant is the maximum for the entire period. In reality, that is, when we observe the results curve of an investment fund or a trading system, we will observe many and very small ones. What is really interesting, more than the current value, is the maximum drawdown. ![]()
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