DRAWDOWN vs PROFITS

 

There is no sense to judge any trading performance if we don’t take in consideration the drawdown. The drawdown tells us what kind of leverage we can use, and this is very important in terms of speculation. The secret in trading is to avoid big losses and achieve big profits.

DRAWDOWN DEFINITION: The peak-to-trough decline during a specific record period of an investment, fund or commodity.

Do you prefer to have a profit of +100 points with a drawdown of 100 points, or do you prefer to have a profit of 50 points with a drawdown of 10 points?

Drawdown vs Profits

 

Obviously, it is better to trade with the second strategy, and the reasons are easy to understand:

 

The drawdown is the real expression of the efficiency of the trading strategy! It is useless to say we made 200 points of profits when we had a drawdown of 400 points! If we were using a capital of 10k, trading with 1 contract, we probably could not trade anymore because the loss during the trading period destroyed our capital before to be in profit of 200 points, and you know, no capital, no profits!

Whenever someone is telling you the final result of his trading record, you should ask what was the drawdown during that period.

In 2014 we had a profit of 124 points trading the S&P500, with a drawdown of 65 points, a bit high because we had troubles in trading a sideways Market during the year, but we could trade 3 contracts with 20.000 USD, and a final performance of +18.600 USD. If we had a drawdown of 150 points, doesn’t matter the final result because at certain point our capital would have been probably destroyed.

In 2013 we had a great profit of 210 points, with a drawdown of 52 points, which is very good! We could trade with a capital of 20.000 USD, with a final profit of +31.500 USD!
But we could not start with a capital or 15.000 USD and trade 3 contracts, because at certain point there is the risk we didn’t have money enough to trade with 3 contracts during the year.

In 2015, we are having a profit of 88 points, so far (today is 10th of June 2015), with a drawdown of 24 points, as you can see the drawdown remains always under control, but the profits are constantly growing.

I hope this article helped you to understand why you have to care more about the drawdown than the final profit when someone is providing you investment or trading strategies.


Daniele Prandelli
I Am in Wall Street Ltd

Skype: I Am in Wall Street Ltd
info@iaminwallstreet.com
www.iaminwallstreet.com
High Probability Trading Techniques - S&P500, Corn, Soybeans, Crude Oil, Gold, US Stocks and S&P/ASX200

 

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It should not be assumed that the methods, techniques, strategies or indicators presented in these e-mail, book, website or Blog will be profitable or that they will not result in losses. There is no assurance that the strategies and methods presented in this e-mail, book, website or Blog will be successful for you. Past results are not necessarily indicative of future performance. The examples presented in this e-mail, book, website or Blog are for educational purposes only. The data used is believed to be from reliable sources but cannot be guaranteed. The methods presented are not solicitations of any order to buy or sell. The author, publisher, and all affiliates assume no responsibility for your trading results, and will not be liable for any loss, damage or liability directly or indirectly caused by the usage of this material. There is considerable risk of loss in Futures, Stock and Options trading. You should only use risk capital in all such endeavors.

 

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