Difference Between a Loss and a Drawdown

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Michael, first of all let me say I love the podcasts. I’ve been listening to them two times a day when possible trying to take in every bit of information. My question is on drawdowns. What is the difference between a trend following drawdown and a loss? Jesse Livermore stared cutting losses at 10% and William O’Neil wrote 7%. When you talk about Bill Dunn’s 40% drawdown how is that different? Are you referring to a downward trend after already being profitable? Say you were up 20% and a trend reverses then you go down 15%. I’m not totally clear on the difference. A brief background on myself. I’ve been trading for just over a year now. I read William O’Neil, then Livermore (because of O’Neil), then found your podcast, and now I’m halfway through your first book. Most recently graduate school has forced me to greatly reduce my trading aspirations until the end of the semester. Also, I’m a born and raised true San Diegan!

Bill S.

If you are at price level 100 and it goes down 40% that is a 40% drawdown. From whatever level of equity–either original capital or capital after an extended profit run. Thanks for the question. Others surely probably were wondering the same thing. Drawdown and loss are the same.

2 thoughts on “Difference Between a Loss and a Drawdown

  1. Michael –

    For us learning the system(s) can you clarify/confirm? — In trend following, losses on single positions are usually cut short (i.e. a trade may have a 2% of total equity loss or a 2x ATR loss). The larger drawdowns in trend following are a decrease in total capital due to a string of trades having losses (or not making a trend up or down), not due to a single position moving 40% down, that would be a ‘down trend’ you could follow.

  2. My understanding would be that a loss is a one time/per trade reduction. A drawdown would be the sum of a few losses due to the loss/win within systematic ratios. Everyone has losses but the wins are supposed to make up for the losses. Drawdowns, as I understand, are the time in between time while waiting for….as Ed Seykota sings “ONE GOOD TREND PAYS FOR THEM ALL”. Whipsaws, irrational price movement, etc…There are a thousand ways to get stopped out but stick with your strategy if the ratios work out right. Do I misunderstand?

    Keep up the great work Michael,

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