Forex Investment Drawdown: Definition, Risk & Calculation
Resource: Euronis Experience
Euronis comes with 14 years of automated algo trading as a top level development and management firm offering its automated trading software to the investing world.
Focus on Drawdown and Risk
The most common way to evaluate if Euronis is right for your investment goals is to look at its investment drawdown. This article explores how to calculate an investment drawdown and defines key concepts to understand like high-water marks.
An Unpredictable Measure of Volatility: Investment Drawdown
Investors often look at one thing when they are evaluating a Forex investment – our past 14 years of return. It is very common that our investors care most about what our returns have been in the past. We all know and accept that Past performance is no guarantee of future results however it’s still good to know the track-record of the forex investment you are interested in investing your hard-earned money with.
The other important component to know about Euronis is the Forex investment drawdown. The Forex investment drawdown measures the lowest point of the Forex investment after its most recent high-water mark. The high-water mark is the highest value an investment has achieved. Measuring this drawdown can clue our investors into just how volatile Forex investment’s returns are.
An easy example is if you were looking to invest $10,000 and you are comparing investments in System A and System B. System A has historical returns averaging 100% while System B has only averaged 25% per year. While System A has an investment drawdown of 35%, System B has an investment drawdown of only 5%.
The worst case scenario: “IF” at one point System A was down 35% from its high-water mark. If you had the misfortune of investing in System A at its high-water mark, you could have seen your investment in System A drop from $10,000 to $6,500. If you had invested $10,000 in System B at its high-water mark and been invested for the drop, his $10,000 would have dwindled to $9,500.
The best case scenario: “IF” at one point System A was down 35% from its high-water mark. If you had the fortune of investing in System A at its low, you could have seen your investment in System A increase from $10,000 to $23,500. If you had invested $10,000 in System B at its low and been invested for at the low, your $10,000 would have increased to $12,500.
Depending on the kind of investor you are and when you enter, System B could be a more palatable choice.
Current charting of our performance across all brokers
More conservative investors seek Forex investments which have smaller drawdowns, often giving up the change for larger Forex investment return. For these investors, it’s more important to not lose their money than it is to gain a large return. Conservative investors try best to avoid more volatile Forex investments. Since Forex investment drawdown is a measure of volatility, they would avoid funds with a larger investment drawdown.
Measuring from Peak to Valley
Forex Investment drawdown is calculated and expressed as a percentage. This indicator gives Forex investors an idea to what they would might experience if their accounts were fully invested during the drawdown. The maximum drawdown level is the most recent low following the high-water mark. The Forex investment drawdown is calculated by subtracting the maximum drawdown level from the high-water mark and dividing the difference by high-water mark.
Investment drawdown % = (high-water mark – maximum drawdown level) / high-water mark
It’s important to note that Forex investment drawdown is REAL and not a hypothetical value or a future constraint. Just because a fund has historically experienced a Forex investment drawdown of only 25% doesn’t mean it can’t experience a larger drawdown in the future.
After putting in a new high-water mark and a new maximum drawdown level, a new Forex investment drawdown can be calculated. This new percentage is always compared to the previous investment drawdowns. Whichever period has the largest drawdown is typically investment drawdown percentage for the investment although we judge performance monthly and annually.
Forex Investments are high risk investment methods because they are leveraged, however today it seems every financial product is leveraged at some level and volatility in the global financial system is not limited to Forex investments.