Drawdown is a Reality of Every Trader
Being able to deal with and understand drawdowns are among the most important concepts in trading and in the life of a futures trader. Misinterpreting drawdowns lead to wrong assumptions and decisions that not only may result in larger drawdowns, but can even mean the “end” of a trading account.
Conventional drawdown parameters and risk metrics such as the Sharpe and Sortino ratio may add value when it comes to understanding one’s own performance. However, we think that on their own, they are not sufficient to understand drawdowns and you may require the understanding of additional concepts to fully appreciate the positive and the negative of your own style, and/or the analysis of an automated system or a managed account run by a commodity trading adviser.
A good starting point is the so-called ‘peak to valley’ drawdown metrics where a trader analyses the largest drawdown periods