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. The reason I dont want to use a helper column is that I would like to calculate maximum drawdown with different starting. 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. Investopedia defines it as: The peak-to-trough decline during a specific record period of an investment, fund or commodity. cell A1) to the next smallest number (A10) before it jumps to the next largest number (A11). Column D will contain the drawdown value. Drawdown (in forex terms) is calculated by the decline from the largest number (e.g. It is simply the max of current equity and previous peak value. Then, in column C you need to calculate ‘Peak Equity’ value. You did a good and an efficient job here.but what if. How to Calculate Maximum Drawdown Originally Posted by pimichel. Suppose you put this information in columns A and B. A simpler way of seeing the formula in action is to reduce the range to say only 4 or 5 cells and jump into evaluate formula. 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. First of all, you need to list down your total equity (capital) arranged in order of dates. 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. Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period.
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