Calculating Drawdowns

by Sep 2, 2021All Articles, Technical Analysis

If you had invested in Netflix at it’s IPO in May 2002 then you would be sitting pretty with a 50,000% gain. On the face of it that sounds like an excellent investment, but looking at the chart would you really have held on when the price dropped almost 75% in the first 5 months of trading, followed by a couple of 80%+ dips? On four other occasions prices dropped 40%, so if you had hung on during any of those declines – known as drawdowns – then you might need to read up on risk management!

Here’s the semi-log chart of Netflix, with the drawdowns marked with the Price Measure tool:

Click on images to enlarge.

In a previous version of this article I showed you how to plot the drawdown using a scripting formula, but we’ve now created a dedicated Drawdown tool in Optuma 2. Here’s the Netflix chart with the one-year drawdown calculated below the chart (i.e. the percentage distance of each day’s low from the yearly high):

The tool can also be set to display the maximum and average drawdown over the lookback period. For example, this chart of Afterpay (APT:ASX) has the drawdown tool set to calculate over the last two years:

The latest low price is 17.3% from the two year high, with the red horizontal line showing the maximum drawdown of 80.5% during the Covid crash in March 2020. The blue line shows that, on average, Afterpay has been 19% below its high over the last two years.

 

Creating Watchlist Columns

 

The scripting formula for the Drawdown tool is DDP() which can be used in scans and watchlist columns. The image below shows a list of global indices and the three outputs (DDP().Drawdown, DDP().Maximum, and DDP().Average) in watchlist columns.

Sorted by average drawdown, the OMX Stockholm All Share index has been within 1.8% of the one year high over the last year, and never more than 9.25%.

The Drawdown tool is available in Optuma 2 which is currently in beta testing. Contact Support if you would like access to it now.

 

Optuma Scripting Forum

 

Don’t forget that we have a scripting section on our forum where we provide examples of interesting scripts that we come across, and where clients can share their ideas as well.

To be notified of new forum posts, sign in to the forum using your same Optuma credentials and subscribe to the scripting thread:

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Darren Hawkins, MSTA

Darren Hawkins, MSTA

Senior Software Specialist at Optuma

Darren is the senior Software Specialist at Optuma. He joined the company in 2009 after attending an introductory technical analysis course. Darren now instructs users all over the world, from experienced Wall Street traders and professional money managers to individual traders drawing their first trendlines.

Darren grew up in the UK and attended college in the USA where he earned a BA in Economics from St Mary's College of Maryland. He went on to spend a few years working at the Nasdaq Stock Market in Washington DC. Going on to live and work in Australia, the US and currently the UK, Darren has a broad understanding of the individual needs of traders, portfolio managers and investors utilising a wide range of methodologies.

In 2014 Darren passed the UK-based Society of Technical Analysts diploma course, and when not looking at charts he keeps a keen eye on England's cricket team - especially if they are playing against Australia. He lives in the Essex countryside in England, with wife Wendy and their labrador, Gabba.

2 Comments

  1. Yan

    Hi Darren,

    Thanks for the amazing work. This tool seems very useful. Personally i am using customed script to calculate various drawdown at my end. Really looking forward to use the official version.

    And all the best for the 2.0 lauch event coming soon

    Reply
    • Darren Hawkins, MSTA

      Thanks Yan!

      Reply

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