Max drawdown

In this article, you'll learn about the max (maximum) drawdown and how it's calculated in Composer.

What is the max drawdown?

The max drawdown of an investment is the greatest percent loss in the investment's value, from its peak to its trough, over a given time period. It is a measure of an investment's downside risk.

What is the formula?

What is the step-by-step calculation?

Let's go through the calculation of the max drawdown step-by-step for a symphony backtest.

We'll look at each value in the backtest period, and keep track of two quantities: the maximum value we've seen and the maximum drawdown we've seen, up to that point.

  • Start with both the maximum value and the maximum drawdown value set to 0, and consider each day's value in chronological order.
  • If a value is greater than the maximum value we've seen so far, record it as such.
  • If not, compute the magnitude of the percentage loss between the maximum value we've seen so far, and the value we are observing; this is the drawdown.
  • If this drawdown is greater than the maximum drawdown we've seen so far, record it as such.
  • Repeat the above steps until we've observed every value.
  • The maximum drawdown we've recorded when we've finished observing all the values is the maximum drawdown over the period.
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