A Nalgo trader explains why drawdown matters: a $100,000 account dropping to $50,000 needs a 100% gain to recover. He recommends keeping drawdowns to 20-25%, which only requires 30-35% returns to break even, and matching your strategy's drawdown to your actual risk tolerance.
So this is a very important metric that you need to analyze. As a Nalgo trader, we call the drawdown. This is very important because if you have a 50% drawdown, right for your audience, let's say you start with $100,000 account, your account dropped to $50,000. This represents 50% of drawdown. To make it back, you need 100% return. So the approach is to have lower drawdown, hopefully between 20, 25% is pretty realistic. But if you want to make back this 25%, I don't have a lot to make. Maybe 30%, 35% pretty achievable. So you have to ask yourself about your risk tolerance. Are you ready to trade a strategy with 50% to maybe potentially make 100 or more or 20, 25%? So it has to fit your risk tolerance.
