We’ve all seen the Weekly Drawdown figure featured in our own and other investors’ eToro OpenBook profiles. But what is the weekly drawdown exactly?
Drawdown can be defined as the decline in an investment, usually represented as a percentage. As with many other statistics, there isn’t just one way to calculate weekly drawdown, as there are several accepted methods across the financial industry, each method based on different factors. Below, I’d like to explain the calculation that we use.
The basic formula goes something like this → (Final Equity – Starting Equity) / Starting Equity
Example: I deposit $100, lose $25 and now have $75 left. The calculation is (75-100) ÷ 100 = -25÷ 100=-0.25
Therefore my drawdown is ↓(25%)
If only it were always that easy, right? Now let’s take a look at how to factor in withdrawals and additional deposits (incl. eToro credits). Here, we add incoming funds to Starting Equity and outgoing funds to Final Equity.
Meaning: ((Final Equity + outgoing) – (Starting Equity + incoming)) / (Starting Equity + incoming)
Example: I deposit $100, lose $25 and then withdraw $25, but redeem a $20 gift card. Are you following so far? I deposited $100, lost $25 of it, withdrew another $25 and then got credited $20 which leaves me at $70 now.
Starting Equity: $100
Incoming funds: $20
Outgoing funds: $25
Profit or loss: -$25 (loss)
Final Equity: $70 ($100 – $25 + $20 – $25)
That means the equation is: (($70+$25) – ($100+$20)) ÷ ($100+$20) = ($95-$120) ÷ $120 = -$25 ÷ $120 = -0.208
Therefore my drawdown is ↓(21%)
And there you have it – this is how we calculate the drawdown figures you see on eToro OpenBook profiles. Let me know how clear it was! 🙂
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Note: Past performance is not an indication of future results. This post is not investment advice. CFD trading bears risk to your capital.