We take a decidedly different stance regarding drawdown than how it is computed in MT4, insofar as we include open trade drawdown in determining maximal drawdown.
Accounting for open trade drawdown is an essential step towards understanding the true drawdown picture. If a trade analysis system ignores it, it is creating a distortion of the actual drawdown. There are far too many systems and traders out there who have had massive open trade drawdowns, and, if they are lucky enough to close these positions in profit, they think they have had no drawdown at all.
We want traders to understand that systems with large open trade drawdowns that eventually close in profit are not without risk - and eventually blow up. Instead, we want traders and clients to understand risk in its truest form, which includes open, intraday drawdown, so that trades can be conducted with more caution and with safer money management techniques, and so everyone has a better chance in preserving their capital.
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To edit your social privacy settings dropdown your [My Account] tab and select [Settings].
Though the feeds and prices between demo and live may look identical, demo accounts differ in terms of execution speed and slippage.
Demo accounts have unlimited instant liquidity with zero slippage, whereas live orders can take longer to process, incurring extra slippage.
There are systems out there, particularly scalpers, which depend on the material difference between demo and live accounts. These scalpers are exploiting things which are purely an artefact of demo feeds and prices, and they cannot work profitably on live accounts.
Since most of these scalpers enter and exit their trades in less than 2 minutes, we have created a rule that disqualifies 'winners' if the majority of their winning trade activity is executed in less than 2 minutes.
Please note, if only some of your trades are opened and closed in less than 2 minutes, it is perfectly fine and reasonable; the rule is designed to filter out the systems that depend on the majority of trades opened and closed in less than 2 minutes for the sake of exploiting the material difference between demo and live price feeds.
From time to time we host a contest that places importance on Drawdown nearly as much as Return. The winning criteria will not be Maximum Equity % Return
, but instead Equity Return : Drawdown Ratio
What Is This?
It is basically the Equity Percentage Return divided by (a multiple (n
)) of the Drawdown Percentage.
(100 + Equity Return %) / (100 + (n
* Drawdown %))
Suppose you have 32% return and 20% draw down with a 0.5 value for n
: (100+32)/(100+(0.5*20)) = 1.2 ratio
Suppose you have 75% return and 50% draw down with a 0.5 value for n
: (100+75)/(100+(0.5*50)) = 1.4 ratio
In this example notice that equity return is still favored in the calculation. It still has double the weight of drawdown. It’s just that now drawdown percent is something one needs to be more mindful of – not just as a level to be avoided, but as a level to keep as low as possible while maximizing gain.
Let's look at the same values with a 2:1 weighting in favor of Drawdown:
Suppose you have 32% return and 20% draw down with a 2.0 value for n
: (100+32)/(100+(2*20)) = 0.9428 ratio
Suppose you have 75% return and 50% draw down with a 2.0 value for n
: (100+75)/(100+(2*50)) = 0.8750 ratio
Why Have This Ratio?
Sometimes having contests based only on maximum equity % return rewards the gambler. When you have 1000+ contestants competing, there is bound to be those who strike it lucky, place trades in the right direction with high leverage.
We believe that in the real world, star traders are those who can achieve excellent returns with low draw down. If you can achieve an excellent return with low draw down, it is more probable that you have an edge in your trading system and money management that does not rely as much on luck and leverage.
Several key metrics are expressed in terms of time weighted return, including the main graph and return metrics. Time weighted return is an algorithm applied to eliminate the misleading impact deposits and withdrawals would otherwise have on return metrics. The basic idea is that making withdrawals and deposits results in splitting the account into different periods, calculating profit within those periods, and then multiplying the periods together in order to achieve the compound return that would occur should no transfers have actually occurred. This is the best possible way to express meaningful return metrics.
Time weighted return algorithm: (note that in the event open positions traverse transfer periods they are 'marked to market' and included in profit and equity calculations.)
Most systems today, such as a Metatrader 4 account statement, express drawdown only in terms of closed trades, so if the trade goes into a huge loss but is never closed and eventually recovers and is closed at a profit, the drawdown is hidden and never expressed - this could be referred to as 'balance drawdown' or 'closed trades drawdown'.
The opposite of 'closed trades dawdown' is 'equity drawdown
', where unrealized losses (and gains or draw-ups) occur regardless of whether a position is closed or open; that is, everything that happens between the opening and closing of the position is recorded and unrealized losses are recorded as drawdown
. The main reason many systems report in terms of closed trades drawdown is not necessarily to hide the truth from you (although sometimes that certainly can be a factor) but also because the algorithm to calculate it is extremely easy, whereas calculating true equity drawdown is extremely difficult
, requiring huge amounts of high-quality, fully-complete data and algorithms that require thousands of times more processing power than calculating closed trades, or even logging of equity.
CBF uses a historical price feed
together with other configurations like time zone settings
per broker server and advanced algorithms
to calculate the equity value of an account for every moment the account exists, and then takes the largest peak-to-valley difference as the 'drawdown' figure, which in facts represents the maximal drawdown.
CBF records the equity high and low for each day and reports it on the graph, thus you can easily see the full range of values the account has been 'worth' and see for yourself the typical drawdowns that occur from various peaks to various subsequent valleys
. Note new Razor graph features: Peak-to-Valley drawdown displayed as point on graph; also, Peak and Valley of largest drawdown now displayed as points on graph.
Time weighted return
, explained above
, is an algorithm applied to remove the misleading affects of withdrawals and deposits to ensure they do not appear as large profits or losses, so the primary and most important graph displays the gain or loss in equity, both high and low for the day, as Time Weighted Equity Return High
(TWERH) and Time Weighted Equity Return Low
It may not seem fair that an unrealized draw-up can then come down and create a drawdown even where the trade has not dropped below it's initial opening point. However, keep in mind if you were investing in a fund you could get in at the top of that peak and suffer that drawdown without having been there for the benefit of the previous climb up.
Let’s look at an example: Opening account balance = $10,000 (equity $10,000, profit 0%, drawdown 0%). You place some big trades and they all go in a positive direction. The equity on your account increases to $20,000, a 100% gain not yet realized in real money, as the trades are still open.
This $20,000 watermark is now your Equity High (EH) position and it is from here that the DD will be calculated. Now, consider you regrettably had no 'Take Profit' or 'Trailing Stop' positions set, the high point occurring when you were absent and not in a position to close the trades. In your absence, the market changed and started to go in the opposite direction, all the way back to $10,000 equity – a 0% gain.
This $10,000 is now your Equity Low (EL) position. Your drawdown (DD) in this example would be 50% as there was a drop from an Equity High (EH) of $20,000 to an Equity Low (EL) $10,000. You still have no real losses on your account as the balance/equity is still $10,000, but you have missed the opportunity to take a profit on your trades and this is reflected by a drawdown of 50%. A low drawdown % identifies one who has strategically optimized their opportunities to maximize the potential 'Take Profit' from trades placed while risk managing their trading losses. This is the essence of successful, long-term, managed forex trading and the guiding principle of the Forex Razor Social Trading network.