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Definition of 'Drawdown'

The calculation and use of drawdown as an indicator of risk is popular in with commodity trading advisors (CTA's). There are three popular performance measures: the Calmar Ratio, the Sterling Ratio and the Burke Ratio. These measures can be considered a modification of the Sharpe Ratio because the numerator is always the excess of mean returns over the risk-free rate while the standard deviation of returns in the denominator is replaced by some function of the drawdown.

In day trading futures the drawdown on a trade is the equivalent of the greatest loss the trade suffered during the period it was open. For example, if you open a trade at a price of 1000 and in the next 45 minutes while you have the trade open it trades as high as 1020 and as low as 975 then the drawdown would be 25.

Don't confuse drawdown with maximum adverse excursion (MAE) which is the maximum drawdown suffered by all trades in a series of trades (for example when back testing a strategy).

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