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How to calculate drawdown properly?

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  • How to calculate drawdown properly?

    I'll do my best to keep this simple and maybe we can make some trading tools to make this even easier.

    Drawdown in pips is easy to calculate.
    Open Price vs Historical High or Low Price ( must be intra-day and not the daily close price).

    A better way would be using the High/low on Daily Candles if the position is held for more than 1 day. If the trade is open and closed within 1 day, you will need to open your chart and see for yourself. Myfxbook makes this extremely easy when the trading history is open. All you need to do is find the trade in question and click on the SYMBOL, myfxbook will show you the entry and exit of that trade on a Chart.

    Drawdown in percentage requires lotsize, account balance and the Pip drawdown

    Lotsize gives you the pip value based on the Account denominated Currency (USD, EUR, AUD, GBP, JPY, etc)

    For forex, the pip value calculation is performed as follows:

    Pip Value = (Pip in decimal places * Trade Size) / Market Price

    Example: Trading 1 lot of EUR/USD with an account denominated in EUR.Lotsize Hidden?

    If the lotsize is hidden you still have the pip gain/loss, the percentage gain/loss and the account balance

    Example: Trading on $10,000 Balance with Hidden lots and 1% Gain at 10 pip gain
    • Account Balance = 10,000
    • Gain = 1%
    • Pips earned or lost = 10
    • 0.01 * 10,000 = $100 USD (percentage gain times account balance = Dollar Profit Value)
    • $100/10 pips = 10 USD ( Dollar Profit Value divided by Pips earned = Pip Value)
    • Each pip is worth = 10.00 USD

    Now here's the drawdown calculation once you have the Pip Value and Pip Drawdown

    Example: Trading on $10,000 Balance with Pip value of 10USD and 400 pip drawdown
    • Account Balance = 10,000
    • Pip Value = 10
    • Pip Drawdown = 400
    • 10 * 400 =$4000 ( Pip Value times Pip Drawdown = Dollar Drawdown Value
    • 4000 / 10000= 0.40 ( Dollar Drawdown Value / Account Balance = Drawdown percentage)
    • 0.40 = 40% drawdown