Definition for annual drawdown?

[lamode]

Hi guys, I was reading the book, the new market wizards, I believe many of you has heard of. One thing that I don't quite understand is what is mean by average annual drawdown and how to calculate that? Do i add all the years that has negetive P/L and divide by the number of years?

Also what excatly does it means by drawdown? Say if I made a 10k account to 12k and then it drop back to 9k, that is 3k drop from the top of my equity, does it means 30% drawdown or I only use the 10k in my calculation, so that would be 10% drawdown?

Thanks in advanced.

[JohnJay]

Hi Iamode,

Drawdown = High of The Latest Peak of your equity curve minus Low of the Latest Trough of your equity curve.

I think the the Average drawdown is something like this:

Locate the low of the troughs of your equity curve. For each low, identify the most high of the most recent peak of your equity curve that occurs before that low. Subtract the low from the peak and you get the drawdown for that particular period.

You do this for every time your equity curve reaches its low after its most recent peak, for that year. You add all these values and divide it by the number of values you have to get the average drawdown for the year.

In this case, drawdown would normally be calculated as a percentage of the equity amount at the beginning of the year.

That is probably the best way I can do in explaining it.

Cheers.

[lamode]

Thank you for the explanation JohnJay.