A crucial step to become an evolved investor is identifying the risks associated to each investment.
A key element to determine the risk of the investor’s trading strategy is the Drawdown.
Ayondo understands the importance of this element, so much so that to progress in the Top Trader career path a contained Drawdown is required.
Risks and Profits
In the investment world, there is not profit without a risk.
Profits are always linked to risk. Usually, the greater the risk, the greater the profit. This, however, is not always the case, sometimes the risk is too high compared to the potential returns.
Hence, the first goal of an investor, be it a social trader or not, should be to assess the risk, understand it, and try to limit it as much as possible.
That is why at InvestinGoal, we prefer talking about risks and the assessment of potential dangers before mentioning profits. It is not for a lack of optimism, and we understand that it is not the best approach marketing-wise, but when it comes to investing capital, there should be no such marketing, because the first major objective that should be sponsored is the safeguarding of your capital.
In other words, your priority must be to identify the magnitude of the risk you are undertaking with your funds.
Protect first… earn later.
Of course, once you can identify and manage your investment risk, the next step will be to find the investment (the trader) who will provide you the highest returns at the same risk level.
The risk of a portfolio is related to the individual strategies of the Top Traders you are following, and their composition within your portfolio.
The risk associated with each individual investor depends on:
- their trading ability;
- the strategy being used;
- the tools they implement;
- their volatility.
The Drawdown calculation is a key element to understand the risk of an investment strategy used by a trader.
The Drawdown represents the intensity of the value reduction (losses) of a capital, in percentage or absolute, and can relate to a single operation or to the strategy in its entirety.
One of the first things we do thoroughly, when analysing a Social Trading company, is to verify that this data is correctly shown or, if otherwise, try to understand in detail how it is expressed, and why.
For more information about DrawDown in general, and not just the Ayondo drawdown, check out the Equity line and DrawDown lesson.
Ayondo’s Drawdown Data
You can find the Ayondo Drawdown data in the “Statistics” block, within the Trader Profile section, but you can also find it, still within the trader profile, in the Risk Metrics section, or as a piece of data in the Rankings List columns.
This data is fundamental to Ayondo, as it should.
Something Ayondo does, which is not done by many other social trading companies, is calculating the max drawdown for the entirety of the trader’s history, not just for the latest periods. This allows you to have very accurate and truthful information about the trader’s real abilities.
Analysing the Ayondo Drawdown is crucial to:
- understand the fluctuations your capital can be subjected to with a particular strategy;
- understand how the trader behaved during losses, when risk is at its highest.
How the Max Drawdown is calculated by Ayondo
As opposed to other Social Trading companies, Ayondo provides the conventionally recognized result of the Max DrawDown (unlike the ZuluTrade’s Drawdown), but most importantly, it applies the calculation to the entire Top Trader operating history (unlike eToro’s DrawDown).
So, we can safely say we are dealing with a Social Trading company who knows how to handle DrawDown, correctly providing it to its customers.
Contrary to what we did for other companies, since the value Ayondo provides is correct, we don’t need to provide you with tools to extrapolate data to calculate the DrawDown.
However, we will show you how to easily find and verify the Ayondo drawdown yourselves.
How to extrapolate the true Ayondo Max Drawdown data
First, you will need to configure the candlestick chart within the Trader Profile, in the Performance Since Registration section, setting the period to Total (so you have the complete operating history of the Top Trader).
You’ll find a chart like the one below.
To better understand the logic of the DrawDown data and of the calculations and reasoning we will be performing shortly, we suggest reading the Equity line and DrawDown lesson.
- we need to find the highest value of the account;
- and the next lowest recorded value.
This can easily be done at a glance, using the mouse pointer.
As the pictures show, Ayondo will display, in the grey box, the minimum, maximum, opening, and closing values of the trader’s account for the candlestick you are hovering on with your mouse (which usually represents the trend of the day’s account).
The displayed data is not real. As a matter of fact, Ayondo always displays results calculating on a hypothetical starting deposit of €100,000. The results however are always proportionally identical to those achieved by the trader.
To put it clearly: you might see a value of €100,000, but the Top Trader could actually have €1,000 on the account. This isn’t important anyway. This means that if the Top Trader has earned a 10%, amounting to €100 in his account, you’ll see a value of €10,000 in the Trader Profile (10% of €100,000). What we’re really interested in, is that the proportions are correct, which they are, as far as we can see.
For the calculation, you will need to consider:
- The High value of the highest candlestick, which is, in this case, 287.849 EUR
- the Low value of the lowest candlestick, which is in this case 220.703 EUR
Now, the simple formula is:
[(High – Low) / High] * 100 = Max DD
[(287.849 – 220.703) / 287.849] * 100 = 23.32
This is it.
Once you have understood the calculation, you can calculate by hand all the intermediate DrawDowns that Ayondo does not display (as it only shows the max DrawDown), maybe even calculating a mean DrawDown, which would be another very useful value.
How you will use the tools and knowledge you have just acquired is up to you now.