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Arnaud Deblander
Sep 22, 2022 10:00 PM

You have probably already heard this term and we have already published an article on the subject. However, we feel it is important to come back to the subject as it is an important tool in strategy selection. As you can see, we are going to talk about the drawdown here! What is it and how to reduce it, we will see all this together!

What is a drawdown?

To assess the caliber of their trading and risk management, traders frequently discuss drawdown or maximum drawdown. A trading account's excellent performance does not necessarily indicate that the strategy or method being used is profitable and risk-free.

The drawdown is a measurement of a trading strategy's loss and, hence, risk. A trading method will only lose as much as its maximum drawdown for a given time frame. On websites like Tradingview, the drawdown is displayed as a percentage and as an amount.

The maximum drawdown of a position or trade is the maximum unrealized loss during the entire range. A trade may have been closed at a profit, but still have a significant drawdown. The trader would have let the trade carry a loss, only to cut it to a gain. The drawdown is a measure of risk on a trade by trade basis. It is a more accurate way to measure the "true" drawdown of a trading strategy. Taking into account the latent losses helps to measure the real risk.

How to interpret it?

All things being equal, the lower the Maximum Drawdown indicator, the better the quality of the trading. Indeed, the Maximum Drawdown corresponds to the worst performance that an investor could have obtained by replicating your trades over a given period. Although past performance does not predict future performance, the Maximum Drawdown allows us to estimate the maximum latent loss that an investor will have to bear if he chooses to invest with you.

For example : 

Following your strategy A, you make an initial investment of $100, and after a string of largely profitable deals, you have earned $150. A 50% improvement in results is excellent! Following a string of losses, you eventually find yourself at $125 before it rises once more to surpass $150, restoring your capital level from before the series of losses. The drawdown is the percentage difference between the lowest level attained and your capital level. The drawdown in the aforementioned scenario is 16.6%.

How to reduce the drawdown ?

Needless to say, a good understanding of your risk tolerance or threshold is important. In fact, it goes hand in hand with drawdown—for some, a 10% drawdown will be too much, while for others, 25% is the way to go.

If a strategy has been adequately optimized, it will be challenging to further minimize the anticipated drawdown. Diversification, or distributing your cash throughout several products and investing instruments, will be the answer to lowering your overall drawdown.

For instance, it would be a wise decision to divide your cash across two or three trading bots if you were using trading bots to assist you in your trading. In this approach, the chances of success may be increased if one bot doesn't perform as expected. Considering that, don't confine yourself to using trading bots only. You can make your money work harder for you in cryptocurrency in a variety of ways.

How to choose the right bot then?

As you know, diversification remains the key when trying to reduce your risk in trading. To do this, it is generally advisable not to put all your eggs in one basket, as the saying goes.

More concretely, on SuperBots for example, it is about investing in several vaults in order not to be exposed to only one strategy. Good news my friends, you don't have to do that anymore, the Super-Vault does it for you!

Super-Vault? Our Super-Vault is the tool designed to simplify your trading. This vault will automatically divide your capital equally between the 5 best performing bots and will rebalance each month, along with the bots evaluation. This is the best way to diversify your capital among the best bots without having to worry about anything.

Conclusion

The drawdown is one of the most interesting tools when it comes to analyzing the risk associated with a strategy. It allows you to gauge the maximum loss before recovery on your capital and thus choose according to your appetite for risk.

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