How To Use the Max Drawdown Metric?

When analyzing your strategies, you might come across many technical indicators. Maximum Drawdown (MDD) is one of the most commonly found metrics – and we’ll explain how it works in just a second.

Maximum Drawdown: From High to Low

Maximum Drawdown records the maximum loss suffered by an asset as it went from its highest to its lowest level over a defined period. Like all indicators, it is expressed in percentage, and it’s actually fairly easy to calculate. Looking at BTC from January 1st, 2022 to November 24, 2022, we see BTC’s maximum price was $47,722, with $15,479 being its minimum. The price dropped -67.88% between these two price points: this is Bitcoin’s Maximum Drawdown for 2022.

Bitcoin's 2022 MDD

MDD is a helpful indicator of downside risk, and it also tracks volatility. As volatility measures the standard deviation of returns, a volatile strategy should have a higher MDD.

Analyzing MDD

Now that we have defined MDD, we’ll see how it works in practice. 

Beforehand, it’s important to remember that HAL strategies are quite varied in their typologies of trades and frequencies: Wise strategies are long-only strategies that catch uptrends and turn neutral in downtrends, Pulse strategies are long/short and always active on the market, and Artificial Intelligence (AI) Pick uses machine learning to select the top-3 strategies for the next 24 hours. 

Now, let’s get into some actual data!

The table below displays a list of HAL strategies’ MDD compared to their underlying asset over the last year (21/11/2021 – 21/11/2022). What do we notice? While ETH shows a drawdown of -78.51% and BTC -73.23%, HAL strategies managed to significantly reduce maximum losses. AI Pick & Pulse ETH even achieved an impressive relative performance compared to their underlying asset.

HAL strategies reducing market drawdown

It’s important to consider MDD to evaluate a strategy’s performances, but this indicator can not live in a vacuum. It needs to be integrated in a global analysis along with other KPIs. The table below compares Pulse: ETH and Artificial Intelligence (AI) Pick with their underlying assets. Both strategies clearly outperform their underlying assets, both in terms of returns and volatility.

Considering MDD with other indicators

And don’t forget to see how MDD evolves on a rolling period. The graph below charts Pulse: ETH’s rolling MDD, alongside ETH’s rolling MDD and helps you visualise how this strategy reduces drawdown over time in a more precise way, with each data point being calculated over the last 60 days.

Pulse ETH Rolling Drawdown - 60 days

Conclusion: Let HAL Be Your MDD Ally

HAL strategies are designed to minimize maximum drawdown, thanks to their strong market analysis and algorithmic decision-making mechanisms. This is especially important in bear periods, such as the one we are currently facing, when traders are looking to limit their losses compared to the market. 

Discover how HAL can help you perform in bear markets, and sign up today to benefit from HAL’s crypto trading expertise.

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Investing involves risk, including the possible loss of all the money you invest. In particular, crypto-assets are a highly volatile and speculative asset class. HAL is only suitable for traders who are willing to bear the risk of loss and experience sharp drawdowns. Past performance is not necessarily a guide to future performance. The performances presented are real performances calculated net of execution fees and slippage from a proprietary Binance account.

The purpose of this material is to provide objective, educational and interesting commentary and analysis on developments in the crypto-assets sector. Nothing in this material should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.