A drawdown in Forex or any trading is the amount that is lost from the level of a previous account equity high to the level at which the account starts to grow so that it will exceed that high.
“High Water Mark” profitability measurement
The “High Water Mark” is the account equity level which exceeds all previous highest levels. It is the measure of account equity that is used for the remuneration of money managers who trade Forex on behalf of their clients. Performance fees will only be paid once a High Water Mark has been reached and, once a payment of a performance based fee is made, then no further payment will be possible until a new “High Water Mark” has been reached.
On the chart above, which is a readout from the performance of the Mandelbrot algorithmic routine for the month of December 2014, High Water Marks were achieved on three occasions before there was a (small) drawdown. Then there were a further two HWMs before the onset of a rather larger drawdown. Note that the single day’s loss on 10.12.2014 might not have defined the drawdown. If there was a further loss on the following day, to bring the account equity to the level shown at “C”, say, then the drawdown would be the cumulative amount that would bring it to that level from the last HWM.
The levels of equity at “A” and “B” are not High Water Marks. No HWM can occur until the account level reaches and exceeds the one that was reached on 08 / 09.12.2014.
At OmiCronFX, we pay particular attention to drawdowns. The Mandelbrot routine is designed to ensure that no session loss can exceed 1.5% of what account equity was at the start of the session. By use of negative compounding, this means that a succession of 20 full-loss session would have to take place before the drawdown would amount to 26.09% of the account equity at the start of the succession of losses.