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.
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