Misunderstanding of maximum drawdown

After reading a recent forum post, perhaps the misunderstanding of maximum drawdown is that the c2 drawdown calculation and a typical traders drawdown calculation method are vastly different.

Advance apologizes if this matter has been discussed prior.

I understand c2 calculates the max drawdown as the maximum difference of the peak_net_balance and the valley_net_balance.

However, typical traders calculate the max drawdown as the difference between the balance of the account and the net balance of the account. The net balance factors in open trades that are in profit or in a loss. When the account net balance is less than the account balance, a drawdown exists.

The c2 drawdown calculation, to the unwary, may imply that the account net balance is less than account balance which is not always true.


Interval: 0
Open Positions : 0
Balance: $1000
Net Balance:$1000
c2_maxDD : 0%
trader_maxDD: 0%

Interval: 1
Open Positions : 1+
Balance: $1000
Net Balance: $1200
c2_maxDD: 0%
trader_maxDD: 0%

Interval: 2
Open Positions : 1+
Balance: $1000
Net Balance: $1100
c2_maxDD : 8.3% (1200-1100/1200)
trader_maxDD : 0%

Interval: 3
Open Positions : 1+
Balance: $1000
Net Balance: $900
c2_maxDD : 25% (1200-900/1200)
trader_maxDD : 10% (1000-900/1000)

Note at time interval 2, c2 calculates the max drawdown as 8.3% (ie open profit drawdown), however the net_balance is greater than the balance. A typical trader would consider the max drawdown to be 0% at this stage, and thus the max drawdown misunderstanding between those that view the c2 stats and traders that use the actual account trading balance/s.

Interval 3, illustrates the large difference between the two drawdown calculation methods.

Neither calculation is incorrect, but personally I prefer to calculate the max drawdown as (Balance subtract NetBalance) but only if the NetBalance is less than the Balance.

In Interval 3, is the drawdown 10% or 25% if the starting balance is $1000 and net balance is $900?
If a trade follower does open a position mid way (ie at the peak $1200) then the 25% drawdown is deserved.

The Balance subtract NetBalance drawdown method calculates the maximum drawdown which excludes open profit drawdowns until the NetBalance is less than Balance , which is an extremely important statistic for most typical traders, which c2 does not calculate.

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I see what you are saying with net balance, but in the investment community, at least everywhere I’ve been, peak to valley is what is used.

Mainly because if an investor started with the strategy when it was at $1200 and opened the same trade, he suddenly has a 25% drawdown by interval 3. No matter what the initial developers balance was.

More importantly, there are alot of systems here that will martingale/hold trades through 50%, 60%, 70% drawdowns (if they don’t get a margin call) and come out of it with a gain because the market turned and they got lucky. If C2 did what you had mentioned “typical traders” do, and not show the graph or drawdown of open trades, you’d think these guys were geniuses instead of just being very, very lucky the account didn’t implode.

For as many things as people complain about C2 for, I believe they do this very well in exposing the potential risk of some systems with their drawdown calculation.


I do not agree with ForexTrader8 nor DogZebra_Investing.

The drawdown should calculate maximum peak (balance) to valley (floating equity) drawdown.

Investors should start with a strategy of closing all open positions. Do not jump into open positions (with floating gains).

I Hope you are taking notes My Brother

Don’t forget that you are doing business here. Insulting other people on the forum will not help to grow it but opposite. Just follow simple business ethics.

As of dd calcs, C2 is following conventional way. If somebody is doing it differently somewhere, it is their decision.

Interesting fact, that only trade leaders doesn’t like the C2 calcs, everybody else are totally fine. :slight_smile:

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I see what C2-LEADER is saying, kind of a modified version. I still like the conservative way C2 does it though.

I hope you can say that to all of us… not to me alone, because i think you taking sides. you were quite when they insulted the way i spoke about C2 draw down, now that it is made clears that c2 draw down is not the same as others calculate just as i indicated… you say i am insulting others, come on. let us all practice business ethics and stop calling us scammers, only to find out you were the ones who did not understand.


Thank you my Brother, and apologies if i said something insulting to you!!

typical traders lose. So why care what they do? :wink: Peak to Vally DD is the industry standard for a reason just like @DogZebra_Investing explained already.

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I generally agree with the C2 calculation of DD but it seems to me there are some slight differences from what I have seen. C2 uses the max intraday drawdown versus what I’ve seen elsewhere where the DD is calculated end of day.

Yeah I’ve seen EoD as well, but in designing my own systems I’ve seen great EoD DD stats, then when I take a closer look intraday its 2x what the EoD is, which is significant. The smaller the timeframe the better if you ask me.

Btw AlexanderG, probably most traders lose cause they are taught to follow the industry standards…

Simplfied example:

Position opened at Interval 0 at price=1000. (no position is opened at $1200…not sure why a trade follower would open a trade midway?).

Position closed at Interval 4 at price=1000. (zero profit).


At interval 2 a positive profit of +$100 and a c2 drawdown of 8.3% (trademaxDD=0%) are contradictory, however correct as per industry standard.

In my opinion, the trade does not have a drawdown until the trade is in a loss at Interval 3 since it is only whilst in a loss that margin call can ever be triggered. I have never heard of a margin call whilst in profit (unless margin requirements increase), hence the importance of the drawdown calculation IMHO.

Also there is a huge discrepancy between the two drawdown calcs at Interval 3 & 4.

In the investment community when you invest (or buy a fund, etc) you are typically immediately invested in whatever securities long/short the strategy has at that time (either end of day/month/etc). The idea is to give each investor identical performance from any given date.

That is why the industry standard drawdown is what it is, and most likely why C2 is wise to follow it.

Nobody prevents subscriber to open position midway. There are long term systems here at C2 for which somebody might want to be in the position right now, not after several weeks. C2 needs to cover everybody.

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I am not suggesting c2 change the drawdown calculation, but rather add the Balance-NetBalance drawdown calculation for reasons mentioned earlier. It’s just a suggestion. I am not going to lose sleep nor do I really care.

Frankly, if trade followers/investors enter positions midway, then most likely they will encounter the peak-valley drawdown/s and deservingly for just being stupid. I suppose C2 needs to cover all, including the idiots.

Anyway good chat…signing off this topic…waste of time.

@ForexTrader8 not touching on your very negative view of investors… but imagine you invest in a strategy like SPY (indexing is a strategy…) the only difference is you can decide to join open positions. Would you be stupid to open the positions?
Maybe next time you think out of your short-term-trading-view-box before posting. If not, we are here to broaden your view. :wink:

Btw if subscribers don´t join open positions they can actually have a larger drawdown than peak to vally of the strategy. So indeed it makes sense to follow 1:1.

They lose because they refuse to build upon those basics and think for themselfes IMHO. And I don´t know how you conclude that industry standards are generally bad. It´s like saying security belts are bad because some people still die in crashes. :thinking:

Anyways, have a nice weekend everyone!

This is true. Good point @Aaa123

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AlexanderG, I’ll explain my drive-by comments regarding industry standards.

I posted 2 messages regarding the shortcomings of the max drawdown calculation and reply from other members was the current industry standard for calculating the max drawdown should/will not change because:

  1. In the investment community when you invest (or buy a fund, etc) you are typically immediately
    invested in whatever securities long/short the strategy has at that time etc etc.

  2. Nobody prevents subscriber to open position midway etc etc.

The 2 x replies are correct, but rather it is a poor reason why the the industry standard for calculating max DD should not be investigated.

Is it logical to introduce an industry standard so a trade cannot be opened midway with substantial floating gains, which more likely would give each investor identical performance from any given date,
but that’s never going to happen, alas my drive-by comments regarding industry standards.

A trade follower/investor that opens a trade midway with substantial floating gains will never make any financial sense.

BTW, your analogy between industry standards and seat belts.
We wear seat belts because we all know it may save our life regardless of an industry standard or not, however trading industry standards are not as obvious as per ongoing debate regarding the merit and calculation method of trading statistics.

An example - let’s say you’re a hedge fund manager. You invested a large portion of your fund in AMZN 6 years ago. After 1 year you have a nice gain. If you’d kept a new investor out of it 5 years ago, he’d be missing out on a huge winner in the portfolio.

You have to think as an investor and not a short term trader. If I’m an adviser/RIA/manager, and I put my clients in various index funds/stocks/etfs that are long term holdings, I’m not just gonna have them sit in cash in perpetuity. That makes no financial sense.

Most of the industry is buy and hold, at least a little while, not constant short term trading. That’s why the industry standard is what it is.


I understand the current max drawdown is an umbrella calculation method that covers all, but that’s
convenient rather anything else.

We all know that timing is a critical component of trading, long or short term, thus if an investor misses the timing, so be it. The fund has an obligation to inform of limited trading opportunities and investor decides to withdraw and seek opportunities elsewhere. But that’s in an ideal world and that’s not how the real world operates.

Institutions agenda is seeking new investors/money for self survival/growth, thus skepticism in
industry standards (ie drive-by comment about most traders lose cause they are taught to follow industry standards) because standards are biased towards financial institutions favor to succeed and the investor pays the price for that success. I understand that if institutions are successful thus are its investors but the balance of success always favors the former.

It’s an opinion and we all have a right to express an opinion as long as no harm eventuates.

Anyway I don’t disagree with your reply because it is what it is, however that does not mean that standards should not be challenged because it is what it is status quo.

Comfortability is the enemy of progress.