Find the Maximum Drawdown in a Sequence of Trades

[Fairman]

Find the Maximum Drawdown in a Sequence of Trades

Twelve trades in R, in order: plus 1, minus 1, minus 1, plus 2, minus 1, minus 1, minus 1, plus 3, minus 1, plus 1, minus 1, minus 1.

Compute the running total: 1, 0, minus 1, 1, 0, minus 1, minus 2, 1, 0, 1, 0, minus 1.

Track the peaks. The first peak is 1 after the first trade. The running total then falls to minus 1, a drawdown of 2R from the peak of 1. It recovers to 1 after trade 4, tying the peak. It then falls to minus 2 after trade 7, a drawdown of 3R from the peak of 1. After trade 8 it reaches 1 again, equal to the peak.

Later, it reaches 1 after trade 10 and falls to minus 1 after trade 12, a drawdown of 2R.

The maximum drawdown is 3R, from a peak of plus 1 to a low of minus 2. The final result is minus 1R, which means the account ended below where it started, despite a 3R winner.

Note the structure: there are four winners of plus 1, plus 2, plus 3, and plus 1, totaling plus 7R, and eight losers of minus 1R each, totaling minus 8R, for a net of minus 1R.

At 1 percent risk, the maximum drawdown is about 3 percent, the final result minus 1 percent.

Exercise: compute the maximum drawdown from your last twenty trades.