In the previous article I showed you what is meant by Drawdown in the classical technical analysis. If you don’t know then what the Drawdown is, you should go to read that one first.
Here instead I will show you what Zulutrade means for Drawdown, what are the major differences from the classical theory, and what are the risks that may occur if you are not aware of the difference.
Given that the analysis and the advance knowledge of the risks is one, if not the most important factor to be analyzed, it is clear that Drawdown become an important player.
Knowing what has been the worst moment of a Signal Provider on Zulutrade, how much it has been deep, and to how many pips it corresponded, his worst series of losses before returning to profit, are certainly some of the most important things of Social Trading.
With this value we can already get an idea of what we can risk if that Zulutrade Signal Provider should replicate his worst moment. There would be nothing strange if it did it, losses in trading are normal, you cannot always win.
It is therefore essential to have clear what Drawdown means, and be aware if instead is meant something different, because on this value I have to build all my calculations about risks, which is the most important thing for the success of my investment.
So, let’s understand what we mean for Drawdown when we see this value in the analysis form of a Zulutrade Signal Provider.
The Drawdown of Zulutrade is the total amount of the losses caused by the only open and losing positions, in a precise moment.
This is the definition, and to make it more understandable let’s take a simple example, or better 3.
- If a Signal Provider, at any given time, has 4 open positions, 3 in profit, one at a loss of 10 pips, Zulutrade will tell you that his Drawdown is -10 pips at that time.
- If a Signal Provider, at any given time, has 6 open positions, 3 in profit, 3 at a loss of respectively 10, 15 and 30 pips, Zulutrade will tell you that his Drawdown at that time is of 55 pips, the sum of only the 3 losing trades at that time (10 +15 +30 = 55)
- If a Signal Provider, at any given time, has 4 operations, all 4 winning, Zulutrade will tell you that at that time his Drawdown is of 0 (zero) pips.
With these 3 examples we now have clear what Zulutrade intends for Drawdown, and especially how they calculate it. The measurements are made only with the simultaneously and losing open positions, and these measurements are made moment by moment.
Then the MAX Drawdown of Zulutrade is simply the instant in which the Signal Provider has been losing the greatest number of pips from its open and losing positions.
The MAX Drawdown of Zulutrade is then calculated as a percentage, as we have seen in the previous article, but of course considering this type of drawdown. It just takes to consider the maximum drawdown of Zulutrade in pips, and then compare it as a percentage of the total number of pips earned, up to that point.
For example,
Max Drawdown of Zulutrade in pips = 300 pips
Pips total earned until that time = 2500 pips
300 / 2500 = 0.12
0.12 x 100 = 12%
Now we have clarified what Zulutrade means by Drawdown, and how this value is obtained, both in pips and percentage.
It’s definitely an important value and indication for our analysis. It’s very useful to know what we can expect when a Zulutrade Signal Provider keeps open some transactions at a loss.
With this data we can know immediately if the Signal Provider has a tendency to let the operations running in loss too much, and if we combine it with an analysis of other parameters, such as the Max Open Trade, the number of cross used, and of the Martingale or Pyramidal style, then we can discover a lot of useful things.
These are all topics that we’ve covered in depth in our video course for professional investors “The Follower’s Journey“.
But, back to the Drawdown pure and simple, we lack one thing to be clarified.
What can be the risk of seeing the Drawdown shown in this way, different from the classical one, without being aware of it?
You’ll find out early next article, the last in this series.
Filipp
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