Hi.
In this article I want to talk about Drawdown, in the specific, obviously, of the Drawdown of the Zulutrade Signal Provider.
If you already know what is meant by Drawdown within trading and classic Technical analysis, I tell you that the Drawdown in Zulutrade is not exactly the same thing.
If instead you don’t know what it’s about, with this article you can kill two birds with one stone. In addition, I will show you what is the main problem that arises from the difference between the classical Drawdown and the Zulutrade one.
Let’s start from the pic 1. This is a classic example of traditional Drawdown.
The chart shown is an Equity Line, which is nothing more than a graphical representation of the account balance, and this could very well be one of a Zulutrade Signal Provider.
The point A is the starting point, the day 1 in which the account of the Zulutrade Signal Provider has not gained nothing yet. Let’s suppose then that on this account are performed some financial transactions that in the month to follow begin to gain profit, and then get closed scoring a profit, let’s say 1000 points, or pips.
The point B represents the new amount of the account of the Zulutrade Signal Provider, spent the month, from that first day 1.
Let’s suppose then again that on this account are opened other financial operations, but this time, instead of gaining, these operations start to lose. After another month the Zulutrade Signal Provider closes them scoring a loss, let’s say of 400 points, or pips.
The point C represents the new balance of 600 points, or pips, once the account on Zulutrade has cashed the losses.
The operations continue, and in the month ahead are generated new profits, and these profits are such that they retrieve all the losses of the previous month, and generates new total gain, such that the account, passed another month, is in profit of 1600 points, or pips.
As before, the point D represents the new balance generated by the Zulutrade Signal Provider, spent the last month.
From the current situation we can draw our own considerations.
The point E is the point in which the account, on Zulutrade, is returned to the maximum level ever reached, the point B, and has also passed it, going to form a new maximum, a new point higher than all the previous, a new high in the balance of the account on Zulutrade, the point D.
Here is the necessary condition for there to be a Drawdown.
A Drawdown (obviously, what is considered as classic Drawdown worldwide) in fact is the extent of the losses of the account before it reaches a new high. In our example, the Drawdown is the measurement between point B and point C, which is the number of pips lost from B to C, before arriving at the point E.
We can say in our case, that the account of the Zulutrade Signal Provider has suffered a drawdown of 400 pips.
Of that Drawdown we can also say that it had a duration of about one month, i.e. a month passed before the accont came back to create a new maximum profit.
We can also express it as a percentage, just by comparing it with the final amount of pips. The account has 1600 and has suffered 400 pips of drawdown. So we calculate:
400 / 1600 = 0.25
0.25 x 100 = 25%
The overall Drawdown of the account, considering its entire historical period, has been of 25%.
These are some of the classic considerations that are made about Drawdown. They are some of the, if not the most, useful reasoning for fully understanding the potential risks that an investment may entail.
Speaking of Social Trading on Zulutrade, what interests us most, it’s really understanding the Drawdown of the Signal Provider we are interested in.
On Zulutrade in fact, of each Signal Provider we can find, well-specified in the details page, his Maximum Drawdown, indicated both in percentage and in terms of pips.
But, watch out.
Is that Drawdown really that one I just showed you? The real and classic one?
The answer obviously is NO. It’s not the same thing. It still refers to losses, but it’s a different thing.
Read the next article because I’m going to make everything clear.
Filippo
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