Drawdown simulations

The importance of measuring drawdown

The drawdown simulation is a statistical technique that injects randomness into the testing dataset to enable better risk analysis. By randomising the order of the historical trades, this simulation demonstrates the different outcomes of the trades that could occur on the premise that it's unlikely an asset will perform exactly the same in the future as it did in the past. By reshuffling the order of the trades and analysing the best/worst/average outcomes, a trader can better understand how a trading strategy could perform in future and detect lucky backtests with misleading performance metrics.

ℹ️ Drawdown is a measure of downside volatility, showing how much a strategy is down from the peak before it recovers. As a general rule, the larger the drawdown, the larger the up and down swings in your strategy which indicates a high-risk and high-volatile strategy. By measuring drawdown, traders can better evaluate if trading strategies fit their risk tolerance and trading styles.